UK shares are on the move as this earnings season continues to move on. And as usual, the biggest brokers in the City are sharing their thoughts on which stocks are worth buying.
One widely followed broker, Shore Capital, has just published its thoughts on two FTSE favourites of we at The Motley Fool, Kainos Group (LSE:KNOS) and Rightmove (LSE:RMV). So, what does the broker recommend? And what risks do investors need to consider with these UK shares?
Capitalising on volatility
Let’s start with Kainos Group. As a quick reminder, this business is a specialist in digitalisation. It works with other companies to find ways to boost efficiency through technology and operational automation across the public and private sectors.
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The shares took quite a tumble earlier this week as management released a trading update. And it seems shareholders weren’t too pleased to hear that full-year revenue is now expected to come in below expectations. It seems with almost all forecasts indicating significantly lower interest rates next year, customers are delaying projects. However, margin expansion is still on track. As such, earnings guidance remained unchanged despite the lower anticipated sales.
Delays can be frustrating. And with Kainos shares trading at a premium, seeing such volatility isn’t all that surprising. In fact, even after its recent tumble, the valuation is still a bit rich, opening the door to potentially larger price fluctuations moving forward.
However, if the delays are eventually resolved next year, 2025 could be an explosive comeback for Kainos growth. In other words, a buying opportunity worth considering might have just emerged. At least, that’s what Shore Capital believes, given it has just reiterated its Buy rating on the stock.
A riskless arbitrage opportunity?
Rightmove is a more common household name. In fact, anyone who has been looking to buy or rent a property has likely used this property platform. And as a business, it’s proved itself to be a cash-generating machine, vastly outperforming the FTSE 100 over the last decade. And on Monday (2 September), the shares erupted by 26% after some exciting news came out.
REA Group – Australia’s equivalent of Rightmove – has announced it’s considering a takeover bid. If combined with Rightmove, it would become the #1 property portal across the UK and Australia. The management team has identified multiple complementary synergies across the two firms.
For Rightmove shareholders, this prospect is understandably exciting. Takeovers often come with significant premiums, especially if a bidding war emerges. That’s likely why Shore Capital has marked Rightmove shares as a Buy on this news to capitalise on the arbitrage opportunity.
However, an investment can only be ‘riskless’ if the deal actually goes through, which is by no means guaranteed. Rightmove hasn’t actually received any formal offer from REA, which doesn’t have to submit one until the end of September.
During this time, REA might change its mind. But even if it doesn’t, there’s still plenty of negotiation room on the table. Even if a deal is agreed upon, regulators also have to give the green light. Needless to say, there are a lot of ‘ifs’ in the air. So, I’m going to be sitting on the sidelines for this one.
