In general, UK shares have outperformed other global stocks this year. The FTSE 100 has returned around 2% over the past year, while the S&P 500 has sunk over 11%. This is mainly due to the abundance of oil and mining stocks in the Footsie, which have dealt with inflationary pressures well. However, this does not mean that there are no beaten-down UK stocks. Here are two I recently bought for their long-term potential.
A beaten-down travel stock
As consumers were forced to stay at home, the National Express (LSE: NEX) share price plummeted to multi-year lows. The past year has not been any prettier, with the company’s share price sinking 25%, far underperforming other UK shares. This has been due to factors such as rising fuel costs, wage inflation, and a shortage of US drivers. These factors are expected to increase costs, placing additional pressure on profit margins. However, I believe that the sell-off has now been overdone.
Firstly, the company is recovering well. For example, in 2022, the group expects full-year revenues of around £2.7bn, which is in line with 2019 levels. It is also over 24% higher than 2021 revenues. It also expects to reinstate its dividend in respect of the 2022 results. This is a factor I think could boost the National Express share price. It also shows management’s confidence in the firm’s prospects.
I am also not overly worried about the recent rise in oil prices. This is because the company has fully hedged oil throughout 2022 and 65% for 2023, which should lead to significant cost savings. With the price of fuel soaring, this may also drive consumers into using more public transport. Therefore, I have recently added more National Express shares to my portfolio and will continue to do so while it is beaten down.
Top-quality UK share
Diageo (LSE: DGE) is recognised as one of the most robust UK shares, delivering a return of over 50% in the past five years. However, over the past year, it has stayed broadly flat and in the past six months it has sunk 13%. Yesterday, the Diageo share price sunk further, as Deutsche Bank put a sell rating on the shares. It also gave a price target of 3,230p, implying an 8% downside. In particular, the investment bank noted that consumer spending may be put under pressure.
However, I remain confident in the future for the group. For one, it owns a drinks portfolio of over 200 brands, including Guinness, Don Julio, and Captain Morgan. These have obtained significant amounts of brand loyalty, meaning that Diageo should continue to possess significant pricing power, helping to offset inflationary pressures. This enabled the group to increase reported FY2022 profits by 22.5% to £2.7bn.
Therefore, I am willing to ignore the recent sell rating by Deutsche and buy more Diageo shares. The company’s quality is far too great for me to ignore and has many defensive qualities, which is ideal in the case of a recession.