With the FTSE 100 index of top UK stocks up 17% over the past year, it might not be an obvious time to start hunting for value. But I believe that there are always some undervalued stocks in a market, just as there are usually overvalued ones too.
Here are three top UK stocks I think are currently undervalued. I would consider adding them to my portfolio at their current prices.
Tobacco giant
There are lots of reasons not to like tobacco stocks. Some investors shun the industry on ethical grounds. Others may be concerned that increased regulation or falling smoking rates could lead to declining revenues and profits.
But I think that pessimism is more than factored into the British American Tobacco share price already. Not only does the company offer a 7.9% yield but it is covered by both earnings and free cash flow. The shares have lagged the FTSE 100 in the past year, putting on only 5%. In the past five years, they have lost 45% of their value. Meanwhile the dividend has continued to grow and the company is ambitiously expanding its non-cigarette business. On that basis, BAT is among top UK stocks I consider to be undervalued.
Top UK stocks: Unilever
Another name on the list of top UK stocks I think is undervalued is consumer goods giant Unilever (LSE: ULVR). Back in 2017, investment guru Warren Buffett offered to take over the company at £40 a share. Today they are within a pound of that valuation, trading just below £41.
Buffett is known as a canny investor, so if he reckoned the shares were worth £40 four years ago, I would be inclined to follow his judgment. Meanwhile, I think the outlook for Unilever has improved. The pandemic has boosted demand for its sanitation products. Admittedly, revenues and profits are lower than in 2017, which could explain the lacklustre Unilever share price of late. Maybe risks such as rising material costs hurting profit margins have scared some investors.
But I think for its collection of famous brands, broad geographic reach, and ability to profit from economic growth in developing countries, Unilever sells at an attractive price. It is one of the top UK stocks I hold in my portfolio. I would consider adding more at the current Unilever share price.
High yielding UK shares
The third of the top UK stocks I think is undervalued right now is Legal & General.
With a price-to-earnings ratio of 13, the famous insurer is among top UK stocks I can buy for my portfolio at what I see as a good price. Legal & General yields 6.4% and has set out plans to increase its dividend in the years to come. A dividend is never guaranteed and the company does face risks, such as the increased competition in asset management from new market entrants like fintechs.
But for its attractive yield, well-known brand and proven business ability, I think Legal & General could be a good addition to my portfolio. The Legal & General share price has risen 18% in a year. But I continue to see value.
