While the FTSE 100 index has had a good run over the last year, this doesn’t tell the full story when it comes to UK shares. Below the surface, there’s been a lot of carnage recently, with many stocks pulling back significantly.
Here, I’m going to highlight two beaten-down stocks that now have substantial upside, according to City analysts. I own both of these stocks, and I’d be very comfortable buying more shares at their current levels.
City analysts see massive share price upside here
Let’s start with Volex (LSE: VLX). This is an under-the-radar manufacturing company that specialises in power cords and cables. Last year, this stock was trading near 500p. However today, it can be snapped up for under 280p.
There are a number of things I like about Volex from an investment point of view. For starters, it operates in a number of high-growth markets including the electric vehicle (EV) and data centre industries. As a result, the company is growing at a prolific rate right now. For the 26 weeks to 3 October 2021, for example, revenue was up 45% year-on-year to $292.7m.
Secondly, management has ‘skin in the game’. At present, executive chairman Nat Rothschild owns around 39m Volex shares (worth over £100m). This means it’s very much in his interests to boost the share price.
Additionally, the valuation is very low. After the recent share price fall, the forward-looking price-to-earnings (P/E) ratio is less than 15.
Of course, there’s a few risks to consider here. One is supply chain disruptions. Another is higher costs.
All things considered, however, I’m very bullish here. It’s interesting to see that analysts at Canaccord Genuity Group have a price target of 510p for VLX. That’s more than 80% above the current share price.
Strong long-term growth potential
Another UK stock that has taken a big hit recently is Keywords Studios (LSE: KWS). It’s a leading provider of technical services to the video gaming industry. Last year, KWS shares were trading near 3,300p. Today however, they’re near 2,430p.
While this stock has lost its upward momentum recently, I remain very bullish on the outlook here. That’s because the video game industry is absolutely booming right now, and looks set to get much bigger in the years ahead.
Indeed, according to Mordor Intelligence, the global gaming industry – which is now bigger than the film and music industries combined – is expected to grow by around 10% per year over the next five years. This industry growth should provide huge tailwinds for Keywords Studios, which is essentially a ‘picks and shovels’ play on the industry.
After the recent share pullback, KWS now has an attractive valuation, in my view. At present, the forward-looking P/E ratio is about 32, which I think is very reasonable given the growth the company is generating at present (19% organic revenue growth in 2021).
One risk to consider is that the company has just appointed a new CEO who doesn’t appear to have much gaming experience. Acquisition setbacks are another risk to consider as Keywords is a frequent acquirer.
I’m comfortable with these risks however. It’s worth pointing out that analysts at Berenberg have a price target of 3,450p for KWS. That’s about 40% higher than the current share price.
