Cheap UK stocks to kick-start an ISA!

Now could be a great time to start a Stocks and Shares ISA. Dr James Fox details the UK stocks he thinks investors should be considering.

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UK stocks have broadly represented good value for some time, in my opinion. There are some fairly simple reasons for this, in my opinion.

For example, S&P 500 stocks roughly trade at a 50% premium to FTSE 100 companies. Of course, there are more ‘expensive’ growth stocks on the S&P 500, and the US is broadly considered a more promising economy. But, for some time, I’ve been saying UK stocks are undervalued.

So following the recent stock market correction, I believe now’s a great time to snap up some cheap blue-chip stocks as the ISA deadline/new ISA year approaches.

Cheap or undervalued

Investors often say they’re looking for cheap stocks, but what they really mean is undervalued. After all, some stocks are cheap for a reason.

Finding undervalued stocks requires some research. It’s not just about finding stocks that are trading for less now than they were a year ago.

I can start by looking at simple near-term metrics such as the price-to-earnings ratio, or the EV-to-EBITDA ratio. These figures need to be compared against peers in the industry to be useful. But this should give me some idea as to whether a stock is undervalued versus a peer.

But, to be more precise, I should use a discounted cash flow (DCF) model. It can be difficult, but we can find calculators on online to help us.

Why now?

UK stocks haven’t been overly popular for some time. There’s Brexit, concerns over the UK economy, labour shortages, and a war in Europe. These factors have been bad for investor sentiment.

But last month, we saw a correction, largely engendered by the fall of Silicon Valley Bank in the US. This mostly impacted financial stocks. But now the fear is passing, and most analysts are suggesting the panic was unwarranted.

So with share prices pushed downwards without any explanation other than sentiment, now could be a great time to buy. I certainly have been.

Top picks

The damage has occurred largely around financials, but there were casualties in other parts of the market too. However, my focus is certainly on the markets hardest hit.

I’ve recently added Standard Chartered to my portfolio. It’s among the most expensive UK banks because it has a weighting towards faster-growing markets in Asia and the Middle East. However, it trades at just 7.2 times earnings, way below the FTSE 100 price-to-earnings average of 12-13 times.

At the moment, Standard Chartered is going ahead with a planned share buyback at 170p discount per share versus when the buyback was announced. The correction has been substantial, and it’s down 22% over a month (up 18% over a year).

Of course, there are concerns about the impact of very high interest rates on bad debt. But, hopefully, rates will cool in H2.

Lloyds is another stock I’ve topped up on. DCF calculations suggest it could be undervalued by 50-70%. It’s fallen less than other stocks, but that’s possibly because it had less to fall. It’s an unloved bank… but one with a very strong business.

I appreciate the near-term impact of interest rate hikes may no longer be positive. Higher rates are good for banks until they’re not. But I’m buying now for falling interest rates in H2 through to 2026. There’s a sweet spot for banks — when central bank rates are between 2-3%.

These two stocks could be well-positioned to deliver growth, and dividends, as part of a balanced ISA portfolio.

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 Lloyds Banking Group Plc and Standard Chartered Plc. The Motley Fool UK has recommended Lloyds Banking Group Plc and Standard Chartered 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.

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