UK stocks form the backbone of my portfolio. Over the past year, that hasn’t been the great for me. The vast majority of non-resource stocks have tanked amid an evolving recessionary environment.
But soon, I might have restart my portfolio from scratch after a planned house purchase.
So, how much money should I be investing in UK stocks? And can I rely on them to help me build up my wealth and maybe get rich?
Opportunity knocks
Right now doesn’t seem like a bad time to start a portfolio, especially if I’ve got some starting capital.
And that’s because many UK stocks are trading at discounts. The FTSE 100 has been pulled upwards by surging resource stocks. But the reality is, many sectors have been challenged by the prevailing economic conditions.
For example, stocks in the housebuilding sector are down around 40% over 12 months, on average.
Now, there’s normally a good reason for a stock being cheap. Investor might be concerned by things like the near-term performance, long-term prospects, dividend health, or all of the above.
So, I can’t just fill up my portfolio with stocks that are cheaper today than they were a year ago. Instead, I need to find meaningfully undervalued UK stocks.
Undervalued UK stocks
UK stocks have underperformed this year because of the economic environment, characterised by high levels of inflation, higher interest rates, and low growth.
This is compounded by factors such as increased barrier to trade post-Brexit and nearly 10 million working-age Britons electing not to work.
One can argue that UK stocks have been largely undervalued since the Brexit vote. But this is dependent on how one views Britain’s future.
I’m fairly optimistic, and that’s because I think there’s an understanding that things need to change.
But despite this, I think UK stocks are a great place to look for undervalued shares.
Because of this, and concerns that a rising pound could wipe out gains on dollar-denominated stocks, I’m content with most of my portfolio being UK-focused.
As such, I rarely invest in US stocks, and I only do this when I have a lot of faith in the growth potential.
Finding undervalued shares
Finding undervalued stocks requires me to do my research. I can start by looking at simple near-term metrics such as the price-to-earnings ratio or the EV-to-EBITDA ratio. I can compare these figures against others and peers in the industry.
And that should give me an idea if the stock is cheap or not.
But, if I want to be more precise. Using the discounted cash flow (DCF) model is a better option.
For example, Lloyds is one of my top picks right now. And, using DCF models found online, I can see that two analysts have the stock as being undervalued — one by 43% and one by 63%.
Buying now also gives me the chance to take advantage of some sizeable dividend yields. Because when share prices go down — assuming dividend payments don’t change — dividend yields go up.
So, can buying UK stocks make me rich? It depends. If I can achieve 8% annually with a compound returns strategy over 20 years, I could turn £20,000 into £98,000. It’s not rich, but I’d be happy. And if I put in more, the sky’s the limit!
