UK shares have been absurdly cheap for ages now. We can debate till the cows come home about why that is. Brexit? A sluggish domestic economy? The lack of a UK tech sector? Or all of the above?
Whatever the cause(s), the fact that high-quality stocks are discounted compared with global peers is surely an opportunity for patient, long-term investors.
Analysts at investment bank Goldman Sachs recently pointed out that every industry sector on the FTSE 100 “trades on a discount”. Every sector!
I have to think this situation cannot continue indefinitely. Even Japan’s long-neglected stock market has regained popularity in recent years. History suggests that UK shares could experience a similar rebound.
A strange anomaly
It’s important to remember that global firms listed in the UK are not fundamentally weaker than their overseas counterparts. Quite the opposite in some cases.
So the lower valuations simply reflect broader market sentiment rather than the actual performance or potential of these companies.
This undervaluation creates opportunities for investors like myself to buy high-quality stocks at a discount. Many are offering market-thumping dividend yields backed up by solid cash flows.
Mid-cap stocks look attractive
It’s not just the blue-chip index though. Goldman Sachs argues that FTSE 250 stocks also look attractive for a myriad of reasons:
- Valuations: many are trading at lower valuations compared to global peers
- Economic recovery: mid-cap companies are benefiting from improved UK economic momentum and pent-up demand due to surprisingly high household savings
- Interest rates: declining interest rates are expected to further support the FTSE 250’s growth
- Currency: a stronger pound favours FTSE 250 companies, many of which are domestically focused
- Supply-side reforms: government reforms in sectors like housebuilding should further boost performance
A share worthy of consideration
One FTSE 250 stock that looks set to benefit from many of the factors mentioned above is Bellway (LSE: BWY).
The housebuilder is well-positioned to capitalise on the new government’s attempts to overhaul the planning system. This is a critical step in addressing the UK’s chronic housing shortage and Labour’s plan to build 1.5m homes over the next five years.
Additionally, as interest rates fall, mortgage affordability will improve, stimulating demand for new homes. This could provide a nice boost for Bellway’s business.
Of course, like all housebuilders, the company has had a tough time recently. In the 12 months to 31 July, revenue was £2.3bn, down from £3.4bn the year before. The underlying operating margin is expected to shrink from 16% to 10%. House completions fell from 10,945 to 7,654.
A further decline in earnings is a risk in the near term, while another inflationary spike in the supply chain could further strain profitability.
Looking ahead though, CEO Jason Honeyman is optimistic. In August, he said: “The improving trading backdrop, combined with the strength of our outlet opening programme, has generated healthy growth in the year-end order book. As a result, we are in a strong position to return to growth in financial year 2025.”
Over the medium term, Bellway’s exposure to the domestic economic recovery, favourable interest rate moves, and government reforms make it a strong candidate to outperform the FTSE 250.
Therefore, it could be a stock worth considering, in my opinion.
