It’s still possible to find deeply undervalued stocks in red-hot markets. It’s just a little harder. And I think investors can still buy bargain UK shares that have been overlooked in the recent bull run.
Rewind three years ago, and there were a lot of companies trading below their intrinsic values. The one caveat I’d add is that the target prices weren’t always significantly above the price at the time.
Because the majority of stocks were depressed — think Liz Truss era — there was less of an argument that some stocks were relatively undervalued. That benchmarking wasn’t possible.
So, what’s my argument?
Well, I don’t believe all UK stocks are undervalued. But I believe there’s a good argument that some stocks have never been so undervalued on a relative basis.
In turn, this could be a once-in-a-decade opportunity.
Jet2
One of the most obvious undervaluations on my radar is Jet2 (LSE:JET2).
There’s a very simple way to view this undervaluation on a quantitive basis. Below I’ve adjusted the price-to-earnings (P/E) ratio for net debt / net cash.
So, as Jet2 has £800m in net cash, and that’s a sizeable proportion of the market cap, I times the P/E by 0.68 to reach an adjusted P/E ratio of 4.1.
How do its peers fare using the same formula? IAG is at 8.9 times. Ryanair at 14.2 times. And easyJet at 6.1 times.
The average of these peers (excluding Jet2) is 9.7. This very crude metrics tells us that the stock could be trading at more than double the current valuation.
Of course, there are caveats. Ryanair is US-listed and IAG is more diversified. What’s more, Jet2’s earnings are expected to pause for the next 18 months while it invests in its new Gatwick hub.
However, I’m very optimistic about the long-term prospects. Institutional analysts agree. The stock trades 49% below the average share price target.
Arbuthnot
FTSE 100 banks have stormed higher in recent years, but small cap bank Arbuthnot (LSE:ARBB) hasn’t.
It is, however, a fundamentally different business. While the retail giants rely on massive loan books and high-volume consumer banking, Arbuthnot operates as a high-touch private and commercial bank focused on bespoke relationships.
This niche positioning allows it to maintain a conservative balance sheet and a diversified revenue stream that is less sensitive to the volatile swings of the broader retail market.
The group has pointed to continued operational growth across deposits, specialist lending, and funds under management, despite earnings falling as interest rates decline.
Once again, it’s the valuation that stands out. It trades at 7.8 times forward earnings — much lower than all FTSE 100 banks — and has a 6.1% dividend yield — higher than all FTSE 100 banks.
However, it’s the price-to-book ratio that highlights the steepest discount. At 0.53, it’s potentially undervalued by 50%. The one institutional analysts covering this stock believes its undervalued by 79%.
Risks? Well, I’m acutely aware that the government’s policies don’t support Arbuthnot’s clientele — some of whom must be emigrating. After all, Rachel Reeves has been jokingly voted the UAE’s top real estate agent for 2025.
Nonetheless, I think both of these stocks represent an excellent opportunity to get richer. Both are absolutely worth considering.
