These UK shares are close to record cheap levels

These two UK shares are trading below their average earnings multiples, creating a potentially explosive buying opportunity for patient investors to consider.

| More on:

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.

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.

Even after the stock market has surged in 2024, there are still plenty of cheap UK shares to capitalise on. And surprisingly, two that have come into my radar this month are both within the tech sector!

Usually, tech stocks carry a significant premium, especially those delivering artificial intelligence (AI) solutions right now. After all, Nvidia’s now trading at a price-to-earnings (P/E) ratio of 67, with rising AI star Applovin sitting at an even richer 88. However, looking at Kainos Group (LSE:KNOS) and Computacenter (LSE:CCC), both stocks are trading significantly lower.

In fact, despite both businesses being perfectly positioned to capitalise on an incoming AI spending boom next year, these tech stocks are trading near their cheapest levels in a decade.

Experts in digitalisation

These businesses are focused on the digitalisation and automation of customer operations. In other words, helping businesses use technology to improve efficiency. As such, they are indeed competitors. However, their approaches are somewhat different, creating space for both companies to win at the same time.

Kainos’s strategy primarily focuses on helping businesses deploy the Workday human capital management platform, as well as upsell their own in-house plugins. On the other hand, Computacenter’s more focused on helping businesses discover what IT solutions they need to complete projects both in terms of hardware and software.

Regardless, Kainos and Computacenter are in a bit of a rut right now. Political uncertainty paired with higher interest rates haven’t exactly been powerful catalysts for growth. And consequently, businesses have largely been putting digitalisation spending along with major projects on hold until economic conditons improve.

Looking at their financial results in 2024 so far, the impact of these headwinds is perfectly clear, with bookings and gross invoiced income taking a hit. So it’s not too surprising to see the Kainos and Computacenter share prices fall by around 20% since January.

A possible opportunity?

As a consequence of falling prices, both stocks are now trading firmly below their historical P/E ratios. Kainos has typically commanded a high premium of 39 times earnings over the last decade on the back of its enormous free cash flow margins. Meanwhile, Computacenter has typically sat closer to 17 times. But today, both companies are trading significantly lower at 20.6 and 14.7 respectively.

That’s why I believe a potential buying opportunity’s emerged. And given that Kainos is now trading at almost half its historical average, it’s an opportunity I’ve already capitalised on. Meanwhile, Computacenter’s impressive track record of hiking dividends makes it a tempting potential addition to my income portfolio.

Of course, no investment is without its risks. Kainos and Computacenter are only cheap if they’re able to bounce back into growth mode. And while lower interest rates paired with political clarity are powerful catalysts, there’s no guarantee that the current sluggish performance will be resolved quickly.

A prolonged recovery could drag these UK shares down even further. And if AI spending doesn’t start delivering results for businesses, the demand for digitalisation could suffer, adding further pressure to these businesses and their valuations.

Nevertheless, their impressive track records make me cautiously optimistic for 2025 and beyond. And if they return to their usual valuation once economic conditions improve, significant share price gains could be unlocked. I feel they’re worth considering.

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.

Zaven Boyrazian has positions in Kainos Group Plc. The Motley Fool UK has recommended Kainos Group Plc and Nvidia. 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

Calendar showing the date of 5th April on desk in a house
Investing Articles

Here’s how a £20k ISA could produce £1,580 of passive income in the next year

A Stocks and Shares ISA stuffed with dividend shares can be a lucrative source of passive income. Christopher Ruane explains…

Read more »

Investing Articles

Prediction: 12 months from now, £5,000 invested in Tesla stock could be worth…

Tesla stock has endured a miserable year so far, falling by 29%. Muhammad Cheema takes a look at how it…

Read more »

Investing Articles

See what £10,000 invested in Tesla shares at their mid-December peak is worth today 

As the world absorbs the full scale of Donald Trump's tariffs, Tesla shares are reeling. Investors who bought the stock…

Read more »

Hand flipping wooden cubes for change wording" Panic " to " Calm".
Dividend Shares

2 ‘safe’ LSE dividend stocks to consider as global markets sell off

As global markets experience high levels of volatility due to economic uncertainty, investors are piling into these ‘safe-haven’ dividend stocks.

Read more »

Investing Articles

US stock market rout: an unmissable opportunity for investors?

His tech-heavy portfolio has been smashed by Trump’s tariffs. However, Dr James Fox believes there could be some opportunities in…

Read more »

Investing Articles

After a 13% ‘Trump tariff’ fall, is the Barclays share price too cheap to miss?

Does the Barclays share price fall mean we should all panic and run screaming from the stock market? Nah, of…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

2 investment trusts to consider for a Stocks and Shares ISA

These two investment trusts have a different focus -- but our writer sees both as worth considering, one more for…

Read more »

Investing Articles

Deutsche Bank reiterates Buy rating on 9.6% yielding FTSE 250 stock that was “most shorted in UK”

Our writer investigates why a major broker remains optimistic about a FTSE 250 stock that was once the most shorted…

Read more »