Right now, we’re seeing a huge shift in the stock market. With interest rates rising, investors all over the world are moving their money from ‘growth’ shares to ‘value’ shares. This shift is benefiting the UK market. That’s because the London Stock Exchange is home to many value stocks.
While there’s no guarantee value will continue to outperform growth, I like the idea of owning a few cheap stocks to capitalise on the rotation into the former. With that in mind, here’s a look at two UK value stocks I’d be happy to take small positions in today.
A dirt-cheap FTSE 100 stock
Let’s start with private equity and infrastructure investment firm 3i Group (LSE: III), which is a member of the FTSE 100 index. This stock looks very cheap right now. Currently, its forward-looking price-to-earnings (P/E) ratio is just 5.9.
I’m bullish on this value stock for a couple of reasons. Firstly, the company appears to have plenty of momentum right now. In a recent performance update, the group said it generated a total return of 33% from portfolios in the nine months to 31 December 2021. It also said it’s set for a “strong close” to its financial year ending 31 March 2022.
Secondly, in the second half of 2021, there were some big insider buys here from top-level executives within the company. Insiders only buy company stock for one reason – they expect it go up.
One risk to consider here is that revenues and profits can fluctuate. This can result in share price weakness at times.
Overall however, I think the risk/reward is attractive right now. The stock is cheap and there’s a dividend yield of around 3% on offer.
It’s worth noting that analysts at Barclays just raised their target price to 1,840p, which is nearly 40% above the current share price.
A value stock offering growth and dividends
Another UK value stock I’d snap up today is Hikma Pharmaceuticals (LSE: HIK). It’s an under-the-radar healthcare company that manufactures generic, branded, and injectable medicines. At present, the stock has a forward-looking P/E ratio of about 12.2, which is well below market average.
There’s a lot to like about Hikma, in my view. For starters, the company has a solid growth track record. Between 2015 and 2020, revenue climbed from $1.4bn to $2.3bn. For 2021, analysts expect revenue of $2.5bn.
Secondly, the company is very profitable (three-year average return on capital of 18%) and it has been growing its dividend at a very healthy rate in recent years. For 2021, analysts expect a payout of 53.5 cents per share, which equates to a yield of around 2% at the current share price.
A risk to consider is acquisitions. Hikma has made a number of them in the past and they haven’t always gone to plan. This could happen again.
I’m comfortable buying the stock at current levels however, as I think the low valuation provides a margin of safety.
And I’ll point out I’m not the only one who is bullish here. Last month, analysts at Peel Hunt upgraded the stock from ‘hold’ to ‘buy’, saying the generic medicine maker’s business and prospects are “under-appreciated” at its current share price.
