Finding undervalued shares is the key to successful investing. But what does this mean in practice? Let’s explore this further and take a look at three potentially cheap stocks.
Intrinsic value
Billionaire investor Warren Buffett likes to build stakes in companies whose share prices don’t reflect the underlying (he calls it the “intrinsic”) value of their businesses. This involves making an assessment of the expected future operating cash flows and then adjusting these to reflect the fact that £1 in a year’s time is worth less than it is today.
This is a common approach used by analysts and helps them come up with price targets for the stocks they cover.
A banker?
Brokers’ consensus is that Barclays (LSE:BARC) is 42% undervalued at the moment (31 March). However, their wide range of estimates (450p-590p) is proof that valuing companies is more of an art than a science. Having said that, even the most pessimistic believes the bank’s shares are 18% under-priced.
Why? Well, it appears to be on a bit of a roll at the moment. Its 2025 earnings were 13% higher than in 2024. It’s now aiming for a return on tangible equity of at least 14% in 2028. It was 11.3% in 2025. Also, via dividends and share buybacks, the bank hopes to return more than £15bn to shareholders over the next three years.
Threats include an economic slowdown, particularly in the UK and US. Also, falling interest rates could affect its margin.
But with a price-to-book ratio of less than one and the second lowest price-to-earnings (P/E) ratio of the FTSE 100’s five banks, I think Barclays looks pretty cheap at the moment and could be considered by value investors.
Uncertain times
Hikma Pharmaceuticals‘ (LSE:HIK) shares tanked in February after the drugs maker withdrew its medium-term guidance and downgraded its earnings forecast for 2026.
The group’s injectables business is currently struggling. It’s facing increased competition for some of its higher-value products. And tariffs on its imports into the US have been an issue.
However, I’m confident that its business will recover. It’s investing heavily and has 118 products in its pipeline. What’s more, the stock’s P/E ratio’s now at a five-year low. Also, it offers an above-average dividend (no guarantees). Further, analysts reckon the stock’s 48% undervalued.
But this is a turnaround story. Its share price is likely to be a bit of a slow burner. However, I still think it’s worth considering.
Cheers!
Diageo’s (LSE:DGE) also seeking to recapture former glories. It’s battling industry-wide trends of people drinking less and a move towards more expensive labels.
But with a reputation for cutting out the fat and streamlining businesses, I reckon the group’s new boss, Sir Dave Lewis, is just what’s needed. And he has some solid foundations on which to build.
The group owns some of the biggest brands in the business, including Guinness and Smirnoff. It also covers all price points in its key markets. Despite its troubles, it remains the world’s number-one for spirits.
Analysts have a target that’s 43% higher than today’s share price. Remarkably, Diageo’s shares are now changing hands close to a 14-year low. On balance, I think it remains one for patient investors to consider.
