Gone with the wind

The first is the Renewable Infrastructure Group (LSE:TRIG). The stock is down 12% over the past year, and is close to 52-week lows. A key driver in this move has been lower expected electricity prices. This directly hit future revenues from wind and solar assets.

This matters because the company’s valuation depends heavily on projected long-term cash flows from power generation. So if the current assumption is lower prices, it could result in lower profits, which investors need to readjust for.

Despite this, I think the reaction has been too much. The share price should closely mirror the net asset value (NAV) of all the infrastructure assets it owns. However, the stock is currently at a 31% discount to the latest reported NAV. This could indicate it’s undervalued.

Further, it looks like a bargain from a dividend perspective. The current dividend yield is 11.67%, making it one of the highest in the FTSE 250. The dividend per share has been increasing for several years, and I don’t see it as being under any immediate threat of being cut.

Of course, the risk of lower electricity prices is an ongoing concern. However, I struggle to see it remaining like this for a long time, given the increasing demand from EVs and AI data centres.

Further room to run

A second option is Hiscox (LSE:HSX). The share price has rallied almost 40% in the past year, but I still think it looks good value! For a start, the price-to-earnings ratio is 10.6. This is below the FTSE 100 average ratio of 18, meaning the share price could still have a way to go before it looks fairly valued using this metric.

The company has good momentum with it. A core driver has been consistent underwriting profits, shown by combined ratios comfortably below 100% (a key insurance profitability metric). This ratio shows discipline in underwriting, which should give investors confifdence the team knows what they are doing.

It’s also benefitting from growth in most market segments. This ranges from retail right through to reinsurance. The outlook appears strong, with projected growth in premiums. As a result, I just don’t think the share price has kept pace with the business over the past year, making it undervalued.

There’s always the risk of catastrophic loss from natural disasters. This is an inherent risk with insurance companies, but it can’t be avoided when investing in the sector.

Overall, I think both shares look like bargains and should be considered by anyone looking for portfolio additions right now.

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For shareholders of takeover targets, that’s translated into impressive, sudden gains. For example, Alpha Group International surged by over 25% in a single day back in July, with Deliveroo delivering similar gains just a few months before.

Clearly, investing before a takeover is announced can lead to some explosive results. And there could be more deals on the horizon with rumours of takeover bids circulating for several FTSE shares, including ITV (LSE:ITV), Hiscox (LSE:HSX), and Serco (LSE:SRP).

Sadly, rumours and reality don’t always cross paths, and suspected bids may never happen. Therefore, investors can often achieve better results by treating a potential takeover as a bonus rather than a leading reason to buy. With that in mind, is there a potential opportunity with these three stocks?

The three stocks

Takeover speculation surrounding these businesses is being driven by a variety of factors. But one common theme among these businesses is their relatively cheap-looking valuation, which could mean opportunity for smaller investors regardless of takeover talk. For reference, on a forward basis, the price-to-earnings ratios of these UK stocks hover between an inexpensive 9 and 14.

However, there are other potential catalysts beyond valuation:

• ITV – repeated reports of interest in acquiring the group’s Studios segment by RedBird IMI and Banijay to take advantage of the firm’s global monetisable content portfolio, paired with ongoing licensing deals
• Hiscox – increased takeover activity within the London-listed insurance sector as bolt-on acquisitions for larger international players to expand into the UK market
• Serco – rising investment interest in the defence and government services industry, combined with the group’s operational improvements and expanding order book, makes it potentially attractive to bidders

Is a takeover likely?

As previously demonstrated, investing before a takeover is announced can yield some lucrative returns. However, it’s an exceptionally risky strategy given that rumours often don’t turn out to be true, even with early signals such as strategic review announcements.

Having said that, looking at these three potential deals, ITV seems the most likely to be targeted given the recurring interest from third parties. That obviously doesn’t guarantee anything.

Therefore, long-term investors need to focus more on the underlying business rather than speculating on a potential buyout. And encouragingly, ITV does show some promise here.

Total streaming hours continue to climb by double digits, annual non-content cost savings are expected to reach £45m this year, and organic revenue growth is on track to recover with profit margins normalising as content investments are trimmed.

The company still remains highly sensitive to the cyclicality of the advertising sector. Given that ad-based revenues lie at the centre of the group’s business model and its flagship ITVX platform, this can create some tricky situations, especially in the current macroeconomic climate.

Nevertheless, I feel there’s a solid investment thesis to be made here for the long term. But investors will need to investigate further to determine whether the risk’s worth the reward for all three of these British stocks.

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In 2025 I’ll be doing pretty much the same as I’ve been doing this year, looking around for cheap shares to add to my portfolio. I’m intrigued by these two. They’re cheaper than I would have expected.

Lloyds of London insurer Beazley (LSE: BEZ) baffles me. As a rule, shares usually look cheap after falling in value. But the Beazley share price has had a blockbuster 12 months, jumping 53.56%. It’s up 95.67% over three years.

Can the share price keep flying?

Half-year results published back in August showed profit almost doubling from $366.4m to a record $728.9m. Investments and cash up 15% to $11.43bn as “favourable” financial markets boosted its investment portfolio by 4.7% to $513m.

On 6 November, the board reiterated full-year guidance despite a “volatile claims environment”, including a $175m hit from Hurricanes Helene and Milton. And here’s what may explain its low valuation.

FTSE 100-listed Beazley is on the front line of climate change, and as the storm season seems to grow wilder, those claims will keep rolling in. There’s always a risk it will take an outsize big hit. Alternatively, a stock market sell-off will hit that portfolio.

I still think it’s a ridiculously cheap with a price-to-earnings (P/E) ratio of 5.19. The trailing yield is a modest 1.73%. It’ll be on the list when I consider which stocks to add to my ISA in the New Year.

Here’s another anomaly. Insurer Hiscox (LSE: HSX) only joined the FTSE 100 in the September reshuffle, so I expected its share price to be flying as it arrowed into the blue-chip index. Yet it’s only risen 6.16% over the last year. It’s enjoyed a little bump in the last month, presumably as index trackers add it to their portfolios, but I’m a little underwhelmed.

It looks good value too

Hiscox has been in the FTSE 100 before, back in 2020. It took a beating in the pandemic, when it was hit with more than £350m of claims. Event cancellation and business disruption payouts triggered a £269m loss.

The board quickly reversed that in 2021 with a £191m profit. It then multiplied that to £276m in 2022 and £625m in 2023. The trailing yield of 2.7% is handsomely covered 5.5 times by earnings. That’s forecast to hit 3.4% next year, with cover still solid at four.

Hiscox specialises in small business insurance, so could struggle if next year proves tough for the UK economy. Fortunately, it has exposure to the US and Asia too.

It’s very cheap, with a P/E ratio of 6.73 times. Again, climate change risk may explain that. It took a $75m hit from Hurricane Milton. Yet I think today’s low valuation is an exciting opportunity, and I’ll consider adding this value stock to my ISA before the April deadline.

The post 2 cheap shares I’ll consider buying for my ISA in 2025 appeared first on The Motley Fool UK.

The journey back to the top

To be clear, this isn’t the first time Hiscox has been large enough to move out of the FTSE 250. Over the years, it has fluctuated between the two indexes. It fell out of the FTSE 100 back in 2020 when the pandemic hit. Fast forward to 2024 and the share price rally of 12% has pushed the market cap up to £3.57bn. This is enough to get it back to the big league.

Before I can fully explain where I think the stock goes from here, it’s important for me to understand how it has traded in the recent past.

The pandemic wasn’t a great period for Hiscox, which specialises in small business insurance. During the 2020 financial year, it was hit with over £350m worth of claims. Most of this had to do with event cancellation and business disruption. As a result, it posted a loss of £293m for the year.

However, it has since been able to perform well. After all, the pandemic shock was a black swan event. During normal business circumstances, insurance is a profitable and proven operating model.

Engines fully firing

Over the past year, Hiscox has been doing well. The interim results that came out in August show that profit before tax grew by 7.1% versus H1 2023. The split of revenue from different divisions likely gave investors confidence going forward, as no one area is overpowering the others.

Retail is doing well, with the CEO also citing that “as the best property market conditions in a decade have mostly persisted into 2024, we deployed more capital early in the year into our reinsurance business”.

Let’s not forget that Hiscox has worldwide operations, including the U.S. and Asia. So even if the UK market underperforms, it can balance this out with other areas.

Thoughts for the future

Despite the rally in the share price, the price-to-earnings ratio is only 6.95. I see this as undervalued, given the fact that I use a ratio of 10 as a fair benchmark. Therefore, the promotion to the FTSE 100 could help the stock to rally further as it attracts more attention from value investors.

One risk is that the stock gets lost in the FTSE 100 due to other larger competitors. These include the likes of Admiral, Prudential, Legal & General, to name just a few! This could stall the momentum of the share price, as investors might already have enough exposure to this sector.

Ultimately, I think the future is bright for Hiscox and am considering adding it to my portfolio.

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Valuation

Shares are currently trading a staggering 71.3% below the firm’s calculated fair value estimate, at least according to a discounted cash flow (DCF) calculation. This gaping discount suggests the stock could represent one of the most compelling value plays among FTSE-listed companies right now.

Obviously, this isn’t a guarantee. However, with many companies now fully recovered from the pandemic, when a company sits significantly below historical levels, I’m interested.

Future outlook

To be sure, the company has faced some near-term challenges that have likely contributed to the depressed share price. Pre-tax profits in 2023 fell 28% year on year as the insurer navigated elevated claims from natural catastrophes and lower investment returns.

However, the long-term outlook appears favourable, supported by growth projections for the global insurance industry. Analysts forecast that revenues will expand by nearly 11% annually over the next few years as it attracts customers across retail and reinsurance. Not dazzling numbers by any means, but with confidence that growth can be sustained, which is what I like to hear.

The firm is also guiding for improved underwriting performance and pricing conditions, key drivers behind the ability to bounce back from the recent earnings weakness. Management remains bullish, with CEO Aki Hussain describing the outlook as “one of the best periods for compound pricing increases in over 15 years“.

Dividend

In addition to the valuation discount and growth prospects, the business offers investors a decent income stream through its reinstated dividend policy. The company currently yields 2.7% and aims to grow the payout over time, having skipped dividends during the pandemic.

While the dividend track record has historically been a bit uneven, the relatively low 18% payout ratio suggests ample coverage and room for growth if the earnings recovery materialises as planned.

Risks

No investment is without risks. With the share price still down from 2020, there are clearly red flags giving many bargain hunters pause for thought. For me, the amount of insider selling over the past three months is a major concern. Obviously this isn’t always related to performance, but with the shares being apparently at a discount, I’m not encouraged when members of the management team are in sell mode.

There are also broader industry pressures like competition, rising costs, and the ever-present threat of outsized catastrophe losses, especially as climate change progresses.

The verdict

Hiscox stands out as a potentially deep value play for those seeking a contrarian opportunity in the FTSE 250. The valuation seems to price in an overly pessimistic scenario, providing a good amount of potential if management can deliver. Despite the risks, I suspect that those willing to be patient may see some rewards in time. I’ll be buying shares at the next opportunity.

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FTSE reject #1: abrdn

Based in Edinburgh, abrdn (LSE: ABDN) was formerly known as Standard Life Aberdeen before losing its vowels.

The global asset manager’s shares were relegated to the FTSE 250 index in August 2022, before returning to the FTSE 100 in December. History has repeated itself, as the group has been rejected from the elite index once again.

At the current share price of 166.1p, abrdn’s market value has dropped below £3.2bn. However, it manages almost £500bn of assets for individual and institutional investors.

What’s more, its 2023 dividend will be 14.6p, matching 2022’s payout. This works out at a juicy dividend yield of 8.8% a year. I don’t own abrdn shares, but that cash payout might be worth me investigating in future.

FTSE flop #2: Hiscox

Provider of niche insurance Hiscox (LSE: HSX) also lost its FTSE 100 status. The Anglo-Bermudan group was in the Footsie for only seven months before a market value under £3.5bn saw it ejected again.

At 1,001p, shares in the Lloyd’s of London underwriter are up 11.5% over one year, but down 40.6% over five years. At the current price, the stock is £2 below its 2023 high of 1,201p on 3 May. However, it is nearly a fifth (+19.7%) above its 52-week low of 836p on 13 October 2022.

Hiscox stock has tumbled since 30 May, largely due to to first-half weakness in its retail unit. I’ve never owned Hiscox shares, but I might take a look at them sometime soon.

Reject #3: Johnson Matthey

Having been founded in 1817, Johnson Matthey (LSE: JMAT) is a 205-year-old speciality chemicals and sustainable technologies company. At the current share price of 1,632.24p, the group is valued at just £3bn, well short of the level needed to remain in the FTSE 100.

At their 52-week high on 3 February, the shares peaked at 2,384p, but then plunged to their 2023 low last Friday (25 August). The maker of catalytic converters is investing in clean-energy projects, including hydrogen fuel, making it popular with ESG (environmental, social, and corporate governance) investors.

Lower platinum group metal (PGM) prices have hit Johnson Matthey’s earnings, but the FTSE firm held its dividend at 77p a share — a dividend yield of 4.7% a year.

FTSE faller #4: Persimmon

Last but not least of the FTSE 100 fallers is UK housebuilder Persimmon (LSE: PSN) — in which my wife owns shares. At the current share price of 1,075p, the group’s market value of £3.4bn means it also misses the cut.

At its 52-week high, this stock peaked at 1,531p on 2 February, before plunging to its 2023 low of 953p on 7 July. The shares have been hammered by falling home sales and house prices, driven down by rising interest rates.

Over one year, this stock is down 27.2% and has crashed by 55.8% over five years. But some investors see Persimmon as a recovery play, given that its stock hovers at March 2013 levels. So perhaps it will return to the FTSE 100 one day?

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Growth for a decade, not a few months

My general thinking is that growth stocks should experience an increase in the share price in the future. Until the business reaches a more mature state and can’t really grow materially much more, the stock should continue to attract buyers. As a long-term investor, buying now and holding for years to come should allow me to benefit from these compounding gains.

For example, the first stock on my radar is Tesla (NASDAQ:TSLA). Yesterday I wrote about the electric vehicle manufacturer and why I think the short-term sell-off isn’t completely justified. With the earnings per share figure growing for each of the past eight quarters, I think the business is becoming much more appealing. As the share price moves back to a fairer valuation (it’s down 7% in the past year), it provides me with a good opportunity to buy.

I get that global supply chain issues could dampen vehicle production in coming quarters. But the infrastructure with the gigafactories is there for the future to be able to ramp up operations when feasible.

It also speaks to my aim of finding a stock that can help me to retire early. Electric vehicles are the future, not just for the next year but for the next decade. The share price gains that I could make if Tesla remains at the forefront of this sector could be very large.

A growth share hidden in the FTSE 250

Another company that ticks the box is Hiscox (LSE:HSX). The FTSE 250 insurance company specialises in small business cover. One area that it focuses on is cyber and data protection. With the UK becoming a more digital economy, I think this area will be a big revenue source for Hiscox in years to come.

It did post a disappointing set of results for the first half of the year. However, most of the issues aren’t problems I envisage staying around for the long term. Some issues mentioned were the war in Ukraine, foreign exchange headwinds with a strong US dollar and the sharp increase in interest rates.

The share price is still relatively muted after the August results, with the price up a modest 3.5% over the past year. If anything, this provides me with a better entry point when I consider buying to hold this for the future.

I feel the business could help me retire early due to the elevated customer demand for specialist insurance types, like cybercrime. It’s also not reached the size of larger players that are in the FTSE 100. With good future performance, it should be able to become a player at the big table.

I’m thinking about buying both stocks now to add to my portfolio.

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I think both of these companies have substantial competitive advantages as well as robust business franchises, which should help them capitalise on the economic recovery as it takes shape. 

Shares to buy for 2022

The first company on my list is the insurance group Hiscox (LSE: HSX). This corporation has suffered over the past 24 months, due to rising claims from business interruption insurance policies.

These claims have forced the group to make substantial payouts to customers, which have weakened its balance sheet and reduced its ability to capitalise on rising insurance rates across the rest of the market. 

However, as the company works its way through these issues and new policies are issued that exclude pandemic cover, this headwind should come to an end shortly. It should then be able to capitalise on favourable tailwinds in the rest of the sector. These are the reasons why I think the corporation would make a great addition to my portfolio of UK shares in 2022. 

With the shackles removed, Hiscox’s growth could accelerate. This could drive a re-rating of the stock. 

That said, the company will always be exposed to insurance risks. Challenges like significant catastrophe losses could hit profitability and weaken its balance sheet. This is something I will be keeping in mind. 

UK shares for growth 

The other company that I think is one of the best shares to buy now is Great Portland Estates (LSE: GPOR). This business owns a unique selection of properties in Central London. The value of these properties plunged last year as the pandemic wreaked havoc with the real estate sector across the country.

However, this year, property values have started to recover. Great Portland’s portfolio increased in value by 2% during the six months to the end of September.

It has also been signing new leases with tenants. The average rental uplift on these leases is nearly 10%. This shows the quality of the portfolio and the rising demand for office space in the centre of the capital.

Despite these attractive qualities, the stock is still trading below its net asset value per share of 796p. Considering this valuation gap, I would buy the stock for my portfolio. I think the value of the shares could increase next year as the economy rebuilds. 

Headwinds the enterprise and may face over the next 12 months include higher interest rates, which could increase the cost of its debt. Additional pandemic restrictions may also hit demand for new leases. This would hurt the firm’s outlook and near-term recovery potential from the pandemic. 

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Worrying developments in Denmark suggest that a dark new chapter in the pandemic could be around the corner too. Hundreds of cases of mutated Covid-19 have been detected that are thought to emanate from the country’s mink farms. Hopes of a clear upturn in the global economy following the horrors of early 2020 are clearly on shaky ground.

That said, I haven’t stopped buying UK shares for my Stocks and Shares ISA. There are still plenty of big-dividend-paying shares out there that could help me get rich despite the threat of a long social and economic crisis.

An ISA investment trap?

Tobacco stocks like British American Tobacco (LSE: BATS) are traditional havens for dividend hunters in troubled times. The addictive nature of their products meant that they could be relied upon to be strong profits generators regardless of the broader state of consumer spending power. This quality still gives it the edge over many other UK shares.

But it doesn’t mean that I’m tempted to buy the FTSE 100 stock today, despite its mighty 8.5% forward dividend yield. Around 60m smokers stubbed out for the last time between 2000 and 2018, according to the World Health Organisation. And the rate of quitters is likely to accelerate as global lawmakers step up their fight against tobacco with public smoking bans, marketing restrictions and so forth. The same regulatory push casts a shadow over the long-term profits outlook for British American Tobacco’s vaping products too.

A better UK share I’d buy

Hiscox Limited (LSE: HSX) is a traditional safe-haven stock I’d much rather invest in today. Spending on general insurance is also one of those things that remains stable during economic upturns and downturns. This particular UK share is one of the insurance industry’s most trusted brands too, making it an ideal pick for these uncertain times. The Covid-19 crisis has caused demand for goods and services with long and proud histories to spike among frightened citizens.

The FTSE 250 insurer’s decision to suspend dividends in April as infection rates ballooned terminates its record of annual payout increases. Still, Hiscox announced plans to pay a dividend later in the year during its latest reassuring update. And based on current City projections, this UK share boasts an inflation-mashing 2.9% dividend yield. Expectations that the annual dividend will soar above 2019 levels next year drive the yield to a much meatier 4.5%.

Finally, Hiscox trades on an undemanding forward price-to-earnings (P/E) ratio of 13 times for 2021. It’s not as good as British American Tobacco’s readout of 7 times for next year. But it’s still quite low when you consider this UK’s brilliant defensive qualities. Besides, the insurer is in much better shape to deliver terrific long-term gains than the battered tobacco titan.

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Hiscox is an international specialist insurer that provides general and commercial insurance products to its customers. These products can range from general home insurance to more complex commercial insurance for businesses.

FTSE recovery opportunity

In 2020 so far, HSX has lost approximately 40% of its share price value. At the turn of the year, shares were trading for 1,430p per share. As I write, shares can be picked up for just 848p. It is worth noting that at the height of the market crash, shares plummeted as low as 692p per share. It has recovered 25% since that low price.

There are three key reasons I believe HSX represents a potential recovery opportunity. First, HSX was one of eight UK insurers that participated in a legal test case to determine whether it should pay out on business interruption claims related to Covid-19 and the pandemic. Based on a favourable High Court ruling, the payout it expects to make is less than one-third the amount initially feared. In monetary terms, this equates to approximately £100m in payouts. I believe this is a good result based on the fact it has approximately 34,000 business interruption policies. The payout figure could have been far higher.

Second, at its current price, I feel shares are cheap to buy right now. The FTSE has been badly beaten by the Covid-19 pandemic and many share prices across it have been weighed down. HSX shares are trading at close to 1.5 times book value, which is a lot lower than in recent times. In addition, broker forecasts for 2021 suggest a healthy $0.74 earnings per share amount with a potential dividend of $0.42. For a company with HSX’s track record, this is an excellent price in my opinion.

Trading update

The final reason is the trading update HSX released today for the nine months to 30 September 2020. For me there were some key indicators showing HSX’s business is resilient against the backdrop of economic uncertainty. Gross written premiums grew by 2%. There was a growth in customer numbers and in the third quarter alone, premiums grew by 15%.

Hiscox separates its business into different segments and nearly all of them saw some form of improvement since the crash. Retail reported growth in all five of its business units driven by its digital platforms. Reinsurance and Insurance-linked Strategy achieved good growth at July renewals with rates up 12% for the year.

HSX has prudently prepared for catastrophe claims in the form of reserving $75m in the third quarter. I believe this shows financial resilience and good planning ahead despite the economic uncertainty across the world.

My verdict

Overall I would be willing to buy shares in HSX at its current price point. I firmly believe it is an FTSE recovery opportunity. The High Court ruling in its favour regarding business and interruption policies and today’s trading update solidify my belief. Don’t be surprised to see HSX’s price and performance continuing to creep in an upward trajectory over the coming months.

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