It has been a strange year so far on the London stock market. The flagship FTSE 100 index has hit new all-time highs, yet some brokers worry about ongoing valuation gaps for UK shares compared to the US.
Amid these choppy waters, here are a couple of opportunities I have spotted – and a pair of possible traps I hope to avoid.
Opportunity 1: quality companies at bargain basement prices
I see those valuation gaps as a potential chance to pick up shares in excellent companies at attractive prices.
For example, transport services group Journeo (LSE: JNEO) this week hit its highest price in over two decades. Yet it is trading on a price-to-earnings ratio of 13. That strikes me as a possible bargain. I recently bought the share.
Government spending on transport is set to grow. I think some of that money could well end up coming Journeo’s way.
Revenues have more than tripled over the past three years. Net profit during that time grew more than tenfold. That sort of growth story seems exciting given the current valuation.
One risk that concerns me is the company’s relatively concentrated group of key customers. For example, last month Journeo announced a new £10m framework agreement with First Bus, building on a £9m one in 2022.
That could be a welcome boost to revenues and profits but highlights how reliant Journeo is on the UK public transport sector. Hopefully, with growth, it can expand its client base.
Opportunity 2: high yields
One benefit of fairly modest valuations is high dividend yields. As yields depend on a dividend per share but also that share’s price, low prices (even on a sustained basis) can be good news for long-term income investors.
For example, even within the FTSE 100 index of leading UK shares, Phoenix Group and Legal & General both yield over 8% while M&G’s yield is just below 8%. That is well over double the current average FTSE 100 yield of 3.4%.
Trap 1: right industry, wrong company (or price)
Tech stocks have had a great few years in the US market (with some bumps along the way). On this side of the pond, though, there have been precious few large-cap UK shares with a compelling tech story.
That risks leading investors to be less careful when it comes to trying to stick to high-quality companies selling at attractive prices.
This week’s news of Qualcomm’s bid for Alphawave IP is excellent news for investors who bought the UK share just before Qualcomm first signalled its interest. They look set to almost double their money.
Investors who have held since the 2021 listing, though, are set to make a sizeable loss. In retrospect, that listing price looks far too high.
Trap 2: only looking at yield
Another set of long-term investors with reason for dissatisfaction are those who own shares in National Grid, after the power grid operator recently cut its dividend per share by a fifth.
The share price has grown by 24% over five years, offering some consolation (although the 45% achieved by the FTSE 100 during that time looks much more attractive).
With high debt and large capital expenditure costs, the cut did not surprise me. Instead of looking just at yield, an investor should always consider the source of dividends.
