There are a number of indicators that can signal that UK shares are cheap. One is a lower average valuation than other markets. Another is an average valuation that’s below historical averages. Perhaps the best indicator, however, is a lot of takeover interest from international buyers. This signals that those in other countries see value in our market.
Recently, international takeover activity in the UK market has been off the charts. Last month alone, more than five London Stock Exchange-listed businesses attracted interest from foreign buyers. My takeaway from all this activity? UK shares are dirt cheap right now.
Takeover activity is elevated
It’s the small– and mid-cap areas of the UK market that have been seeing the most activity on the takeover front. And this is understandable, as many shares in these areas have fallen over the last 12 months and now trade at low valuations.
Institutional stockbroker Numis Corporation is one company that has recently attracted a takeover offer. On 28 April, it announced that Deutsche Bank had made a £410m offer for the firm. This sent the Numis share price up nearly 70%.
Online retailer THG is another company that has seen some activity on this front. On 17 April, it announced that it had received a preliminary buyout proposal from private equity giant Apollo Global Management (which also made a bid for consulting firm John Wood Group back in February). This development sent its share price up about 40%.
Payments company Network International Holdings has also attracted interest from international buyers. On 13 April, its share price shot up more than 20% after it came to light that a consortium comprising CVC Advisers Limited and Francisco Partners Management, L.P. were interested in buying the company.
On the same day, Dechra Pharmaceuticals – a member of the FTSE 250 index – advised that it was in discussions with Swedish investment company EQT on a takeover deal. This sent its share price up 40%.
Now, this is just a selection of the UK-listed companies that have been involved in takeover situations recently. There are many more. Overall, takeover activity has been elevated.
Low valuations
Personally, I can’t remember a time when international takeover offers were rolling in at the rate that they are today.
There’s only one conclusion from this activity, to my mind. And that’s that the UK stock market is undervalued right now.
This leads me to believe that it’s a good time to be investing in UK shares. Especially smaller companies that are out of favour and well off their highs.
I’ve certainly been doing this myself. In recent months, I’ve added to my positions in IT company Softcat, 5G specialist Calnex Solutions, and electric vehicle supplier Volex.
Of course, there’s no guarantee that these UK shares (or any others) will perform well from here.
However, given that their share prices are nowhere near their highs right now, those lower valuations mean I like the risk/reward set-up.
