The UK stock market has seen considerable upward pressure in recent weeks. Despite this, many stocks are still trading at a discount after the 2022 correction. In short, resource stocks have surged, while companies in a host of other sectors have suffered.
So why do I think now is the right time to invest?
Undervalued stocks
In this market I can buy low and hold my stocks until they’re at a place where I would consider selling them. This is essentially the main premise of value investing.
Stocks may appear cheap if they’re trading for less than they did a year ago. But it’s not that simple.
I want shares that are actually undervalued. And I think these stocks are easier to find in a bear market than a bull market.
How do I find such stocks?
This is where I have to be clever to find the right stocks. So I need to do my research.
I start by looking at simple calculations such as the price-to-earnings, price-to-sales, or enterprise value-to-EBITDA ratios. These metrics, along with many others, help me in deciding whether a stock is cheap or not.
Many websites will provide me with this data, so all I have to do is compare stocks in similar sectors. However, this can be a bit simplistic.
There is no perfect way to value a share, but the discounted cash flow (DCF) model can help. It requires me to make estimates as to the cash flow of a company over a period of time — often 10 years — and this can be tricky.
This metric attempts to determine the value of an investment today, based on projections of how much money that investment will generate in the future.
Value picks
Value investing strategies have constantly outperformed major indices over the past century. Just look at billionaire super-investor Warren Buffett’s success. That’s why I do it too.
One stock I’ve recently bought more of is Barclays. A DCF calculation with a 10-year exit suggests the firm could be undervalued by nearly 70%.
Higher interest rates could play a role in pushing the share price upwards in the near future. Some analysts predict that higher rates could lead to a tailwind of £5bn in incremental revenue by 2025.
It may also be trading at more of a discount versus its peers after a tricky year in which impairment charges rose and the bank was fined $361m over securities sold in error.
Barclays trades with the lowest P/E ratio of all major UK banks at 4.7. There are naturally concerns about the impact of a recession, but broadly I think these are overplayed. Especially considering the positive impact of higher interest rates.
I’m also looking to buy more of pharma giant GSK. There are near-term risks, such as the possible re-emergence of the Zantac case, but it sounds like the firm doesn’t have a case to answer for.
Trends suggest that, as the world’s population ages, we’re going to need more drugs, treatments and vaccines. And GSK is at the forefront of development.
Right now, a DCF calculation suggests the stock is undervalued by 22%.
