The UK remains the land of undervalued stocks, in my opinion. There are numerous solid businesses trading at cheap-as-chips valuations, especially smaller ones.
Here, I want to highlight a stock example, quite literally. But first, I must warn readers that things are now going to turn gloomy…
Depressing backdrop
That’s because today (28 July), insolvency expert Begbies Traynor (LSE: BEG) released its latest quarterly (Q2) Red Flag Alert report. And it made for grim reading.
According to this, nearly 50,000 UK businesses were in “critical” financial distress. That figure was up 21.4% from a year ago.
Worryingly, every single one of the 22 sectors tracked saw an increase in distress. And the number of companies in “significant” financial distress (a step down from critical) also rose sharply to 666,876, up 15.2% from Q1.
There were some glimmers of hope, with sectors like manufacturing seeing modest improvements. But it’s clear that businesses are being squeezed by rising costs, higher wages, and fragile consumer confidence.
Elsewhere, hedge fund manager Ray Dalio is warning that the UK economy appears trapped in a “doom loop”. Gulp.
I did warn that this was gloomy stuff!
Facing up to reality
Now, one silver lining might be that most politicians now recognise that the UK is in economic decline. Acknowledging the problem is half the battle, as they say.
Deregulation of certain areas is being talked up, as is unleashing AI across the bloated public service to improve efficiency. Looking ahead, falling interest rates might help boost consumer spending.
For investors, it means that there are probably many quality small-cap UK shares being thrown out with the bathwater, due to all the pessimism.
The FTSE stock
Returning to Begbies Traynor, this looks like an interesting opportunity to me. The company specialises in insolvency, restructuring, and turnaround advice, stepping in when firms are in serious financial trouble. In other words, it helps struggling businesses.
The firm is quite small, with a £194m market cap, and is listed in the FTSE AIM 100 Index. The share price is up 28% year to date, but still around 14% lower than three years ago.
Begbies Traynor is doing well operationally. In the year to 30 April (FY25), revenue increased 12% to £153.7m, while adjusted earnings before interest, taxes, depreciation, and amortisation (EBITDA) rose 11% to £31.7m.
It was the firm’s tenth consecutive year of profitable growth, during which time adjusted pre-tax profit has grown sixfold.
Now, one thing to note here is that Begbies Traynor operates in a very competitive market. And given the state of the economy, that could intensify further if more firms pivot towards insolvency and restructuring services.
Encouragingly, though, management says that the company has maintained its market-leading position (by volume of appointments). And it expects larger, higher-value cases to continue driving growth.
Despite this, the stock is trading at just 10.6 times next year’s forecast earnings (FY27). When paired with a 3.6% dividend yield, that looks attractive.
Meanwhile, brokers covering Begbies Traynor have it down as a Strong Buy, with a 155p price target (around 27% higher than the current 121p).
Of course, there’s no guarantee it will reach that price. But given the dire economic conditions, I think this insolvency specialist will do well, making the stock worth considering.
