FTSE 100 stocks registered varying fortunes in 2022. Some stocks, mainly those in the resource sector, pushed upwards, while the majority of UK stocks were dragged downwards.
While this market correction hasn’t been good for the vast majority of investors, it also creates opportunity. So with that in mind, I’m looking to propel my portfolio forward in 2023 with some discounted UK stocks.
What are discounted stocks?
Firms in retail, housing, and banking among other areas have slumped in the evolving recessionary environment. This is especially the case for stocks that are more UK focused.
But just because stocks are trading for less than they did a year ago, it doesn’t mean they’re necessarily better value. In fact some stocks are cheap for a reason.
Finding discounted stocks requires me to do my research. I can run discounted cash flow models and I can look at near-term metrics such as the price-to-earnings or EV-to-EBITDA ratio and compare it against peers.
Why I’m buying now
We have seen stock pushed up in 2023 already. And that’s clearly positive. But with the FTSE 100 pushing above 7,700, I still think stocks in several sectors have further to go.
Expectations from the Economic Forecast Agency (EFA) suggests that the FTSE 100 could push as high as 9,727 in May. That would be fantastic. In fact, the EFA’s forecast for the coming months suggest further upside across the board.
| Month | Forecast close — average |
| February | 8504 |
| March | 8384 |
| April | 8803 |
| May | 9176 |
| June | 8849 |
My top picks
Banks have been my top pick for a while. And this is because higher interest rates are pushing up margins.
Lloyds (LSE: LLOY) is the bank with the greatest net interest income sensitivity — its income is more sensitive to changes in interest rates. That’s because of its funding makeup and lack of an investment arm.
The firm is even making more interest on the money it leaves with the Bank of England (BoE). Analysts have highlighted that for every 25 point basis hike, Lloyds will earn around £200m in income from reserves held with the central bank.
With the base rate up over 300 points in 2022, and more to go in 2023, Lloyds could be earning a further £3bn solely from assets held with the BoE.
I’ve recently bought more Lloyds shares as I hope to see further upside in the coming months and years, despite the forecast recession. Valuation calculations suggest it could be considerably undervalued.
I’m also looking to buy more shares in medical device manufacturer Smith & Nephew. The firm faced challenges during the pandemic as national resources were allocated towards Covid and not operations like hip replacements. And, more recently, inflation put pressure on margins.
But, moving forward, there is a huge backlog globally for elective procedures and margins should normalise over time. These factors should get the firm back on track despite the lingering impact of Covid.
