2 UK stocks I can’t believe are this cheap!
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On Tuesday, my Motley Fool colleague Royston Wild punched out an article explaining how analysts from US bank JP Morgan thinks UK stocks are cheap.
While the US and eurozone stock markets have roared ahead, the UK’s has fallen behind since the Brexit referendum. But I reckon it’s unclear whether Brexit is the cause of the laggard performance delivered by UK stocks or not. Nevertheless, I agree with JP Morgan that the UK market looks tempting. And there are several shares I can’t believe are as cheap as they appear to be.
Branded consumer goods in the food sector
For example, shares in Premier Foods (LSE: PFD) were changing hands near 109p recently. And at that level, the branded fast-moving food products company has forward-looking earnings multiple of just over nine. That’s when calculated using analysts’ estimates for earnings. And they expect a rise of around 12% in the current trading year, and almost 6% the year after that.
Of course, such estimates aren’t set in stone. And any number of operational challenges could arise to cause the business to miss expectations. However, Premier Foods is in the middle of an impressive turnaround and refocusing of its operations. And I reckon the business has the potential to perform well and grow in the years ahead.
In July, the company issued a trading statement saying it had seen a “very encouraging start to the year.” And first-quarter trading and profit before tax were at the “top end of expectations.” Back then, the firm’s turnaround appeared to be on track. We’ll find out more with the half-year report due on 16 November.
Paper-based packaging
Another I’m keen on is sustainable paper-based packaging company DS Smith (LSE: SMDS). City analysts expect a robust rebound in earnings in the current trading year to April 2022, and a further uplift of almost 18% the following year. However, with the share price near 379p, the forward-looking earnings multiple is just below 11 when set against those expectations.
I don’t think that’s screamingly cheap, but it does seem reasonable to me. That’s because the business has been riding a wave of demand driven by the fast-moving consumer goods sector, e-commerce and the general shift to recyclable or biodegradable packaging.
In October, chief executive Miles Roberts said positive trends and momentum continued in the first half of the firm’s trading year. And the financial performance of the business was “in line” with directors’ expectations,“with very positive box volume growth, good cost recovery through increasing pricing and an enhanced performance from our US business.“
He said all those factors combined to more than offset significant input cost increases.
A decent business in a growth phase
And because of that update, I think investors might have been concerned too much about the well-reported supply-chain issues around and the recent rise of inflation. Overall, this strikes me as a decent business proceeding through a period of growth.
We’ll find out more with the half-year results report due on 9 December. But, in the meantime, I’d be inclined to dig into both these stocks with further research. And although there’s no certainty that I’d experience a positive investment outcome, I’d aim to hold them for at least five years as the growth and recovery stories play out.
Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended DS Smith. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.