Value stocks are tipped to make a huge comeback in 2021. Now that coronavirus vaccines are being rolled out and an economic recovery looks to be on the cards, many financial experts believe that ‘value’ will finally outperform ‘growth’.
Personally, I don’t plan to exactly load up on value stocks this year. That’s because many cheap stocks are cheap for a reason. That said, there are a few UK value stocks I like at the moment. Here’s a look at three I’d be happy to buy for my portfolio today.
UK value stocks
Packaging is a sector that I expect to perform well this year due to the continued growth of online shopping and one value stock I like in this sector is DS Smith (LSE: SMDS). It’s a leading provider of sustainable packaging with a focus on the e-commerce and consumer goods industries.
DS Smith’s profits took a hit last year due to the coronavirus. However, the company appears to be confident about its future prospects. “We are as excited as ever about the structural growth drivers for corrugated packaging with a number of trends accelerated by the Covid-19 pandemic,” the group said in December. It also said that it would be resuming its dividend.
I identified DS Smith as a top value stock in September when it was trading below 300p. Since then, it has risen to near 400p. However, I think the stock is still undervalued. Currently, the forward-looking P/E ratio is 14 – well below the FTSE 100 median P/E of 17.
A P/E ratio of 10
Defence giant BAE Systems (LSE: BA) is another value stock I like right now. Its share price is still nearly 25% below where it was pre-Covid-19. I view this share price weakness as a buying opportunity. Currently, the stock’s forward-looking P/E ratio is just 10.
BAE Systems held up well last year due to the fact that its revenues are largely government-backed. In a trading update in November, for example, the company advised that it had continued to deliver a resilient performance in line with its expectations.
Like DS Smith, the company appears to be confident about the future. “Our large order backlog and incumbent programme positions are expected to lead to strong and profitable top line growth with increasing cash conversion in the coming years,” the company said late last year.
Strong long-term growth potential
Prudential (LSE: PRU) is the third UK value stock I like. It’s a leading provider of financial services.
Prudential experienced some challenges last year. Sales were impacted by both the coronavirus and political uncertainty in Asia. However, looking ahead, the group appears to have attractive growth prospects.
Last year, the company advised that it plans to split off its US operations in 2021. This means that in the future, the group will be solely focused on Asia and Africa – two markets with massive growth potential. It believes that once it has separated off its US arm, it can achieve sustained double-digit growth in embedded value per share.
Analysts expect Prudential to generate earnings of $1.79 this year. This means that at the current share price, the stock sports a forward-looking P/E ratio of just 10.9. I think that’s a bargain for a company with such strong long-term growth potential. I’d snap up this value stock today.
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Edward Sheldon owns shares in DS Smith, Prudential and BAE Systems. The Motley Fool UK has recommended DS Smith and Prudential. 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.