A once-in-a-decade opportunity to buy cheap UK shares!

Dr James Fox takes a closer look at UK shares and explains why he thinks now’s a great time to buy after the recent stock market correction.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Close up of a group of friends enjoying a movie in the cinema

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

UK shares have fallen in recent weeks. In fact, the FTSE 100 is down around 6% over a month, while the FTSE 250 has fallen 7%. But some sectors have fared worse than others. The main casualty has been financial stocks.

So let’s take a closer look at why this might be a once-in-a-decade opportunity to buy UK shares.

Stocks tumble, but why?

Stocks have tumbled over the past month, triggered by a collapse of Silicon Valley Bank. The fall of the tech-financier led many investors to worry that other banks were sitting on huge unrealised bond losses.

Concerns about the health of the global finance sector were worsened by Credit Suisse and its eventual buyout by UBS. As a result, bank stocks have suffered, and other sectors have followed.

But many analysts are saying that the sell-off in banking stocks is unwarranted. After all, SVB and Credit Suisse are fairly unique. The former had less varied bond portfolio than most big banks, and greater exposure to riskier tech markets. The latter had faced scandal after scandal.

As such, the resultant 20% fall in the value of Barclays, among other well-regulated and secure banking shares, should be viewed as an opportunity. For one, it’s the quality of bank loans and safety of their deposits that matter most.

These types of opportunities don’t happen all that often. After all, this correction was caused by fear and not by any changes to the business environment or performance concerns.

It’s very rare that we get an opportunity to buy a blue-chip stock at a 20% discount versus two weeks previously. And the thing is, banks tend to be pretty steady. They’re cyclical stocks, but there have only been two banking crises in the 21st century that have impacted UK banks. This really could be a once-in-a-decade opportunity.

Very attractive valuations

Sometimes, share prices fall for good reasons. So I need to make sure I’m not just buying stocks that appear cheaper than they used to be. This stock market correction is a rare opportunity to buy meaningfully undervalued shares.

Picking undervalued stocks isn’t always easy and it does require research. I can start by looking at simple near-term metrics such as the price-to-earnings (P/E) ratio or the EV-to-EBITDA ratio. These are by no means perfect ways to value companies, but by comparing these metrics among stocks in the same sector, we can develop an idea as to which ones may be best value.

Then there are more complex metrics such as the Discounted Cash Flow (DCF) calculation. This requires us to make forecasts about a company’s future cash flow over 10 years, and that can be challenging. But the result can be worth it.

For example, a DCF calculation suggests that Barclays is undervalued by a whopping 73%. Combined with the fact that Barclays trades with a price-to-earnings ratio of just 4.4, way under the FTSE 100 average of 12 and below its peers, I’m confident the stock is a great buy.

But it’s not just banks. A host of stocks have been pushed downwards, but I’m focusing on hard-hit financials. I particularly like Hargreaves Lansdown. It trades with P/E of 15, but for a tech-cum-finance business, I don’t think that’s expensive. Right now, it’s making a fortune on interest on client deposits.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Fox has positions in Barclays Plc and Hargreaves Lansdown Plc. The Motley Fool UK has recommended Barclays Plc and Hargreaves Lansdown Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

What kind of return could I expect by investing £100 monthly in a Stocks and Shares ISA?

Using a Stocks and Shares ISA to avoid capital gains tax could grow a £100 monthly investment into a second…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

Can strong operational momentum keep the Informa share price rising?

FTSE 100 company Informa has been performing well, but this may be just the beginning of a multi-year trend for…

Read more »

Market Movers

What’s going on with the Britvic share price?

Jon Smith flags up why Britvic's share price is surging on Friday, but believes that the company is in a…

Read more »

Cheerful young businesspeople with laptop working in office
Dividend Shares

2 super-cheap passive income shares I’m eyeing up right now

Jon Smith discusses two of his favourite passive income shares in the banking and property sectors, both featuring yields above…

Read more »

Chalkboard representation of risk versus reward on a pair of scales
Investing Articles

Up 37.5% in just 12 months, I think this is one of the FTSE 100’s best investments

Our author says this FTSE 100 company is likely to keep on capitalising on the AI and data boom. But…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

This UK share just spiked 15% on bid news. Can we bag a quick profit?

UK share prices are having a good 2024, so far, and this one's already up 39%. Two takeover bids in…

Read more »

Young Caucasian man making doubtful face at camera
Investing Articles

I’m ‘blowing a raspberry’ at Raspberry Pi shares. Here’s why

Some early investors have made great profits from Raspberry Pi shares. But our writer's questioning whether the 'easy money' has…

Read more »

Asian man looking concerned while studying paperwork at his desk in an office
Dividend Shares

Here are brokers’ new price targets for Legal & General and National Grid shares

City analysts are generally very positive on National Grid shares. But they're not quite as bullish on the Legal &…

Read more »