Investors aren’t too keen on UK shares right now. This is highlighted by the fact that the FTSE 350 is down 2% over five years.
Incidentally, the largest companies — those on the FTSE 100 — have been hauling the FTSE 350 upwards as the FTSE 250 is actually down 9% over the period.
But legendary investor Warren Buffett tells us to “be greedy when others are fearful” and vice-versa. So surely now’s the time to be looking closely at UK stocks, while giving Nvidia and its surging AI peers a wide berth?
I certainly think so!
Value investing
Buffett is a value investor, possibly the most famous of all time. Value investors look to buy companies trading below their intrinsic value and hold them. Often these stocks are held for a very long time, because a company is unlikely actualise its potential overnight.
The hard part can be finding these undervalued stocks. But it’s certainly easier to find them in markets that aren’t booming. As noted, despite the buzz around AI, Nvidia shares are up 104% over 12 months. That’s not a part of the market value investors will likely be targeting — I’m certainly not.
Broadly, we can identify that the UK market is depressed, and that’s a good environment to find undervalued stocks.
But identifying individual stocks requires research. We can use near-term metrics, such as the price-to-earnings ratio, or the EV-to-EBITDA metric. And for a more precise idea of valuation, we can use a discounted cash flow (DCF) calculation.
Is it worth it? Well, over the last century, value investing strategies have consistently outperformed all major indexes.
Buying the dip
Not all UK stocks are down, that’s clear. Some sectors and some companies are surging — just take a look at AstraZeneca. The biopharma giant is up over 100% in five years and 17% over 12 months.
But, more broadly, there are hints the UK market might offer better value than its international peers. FTSE 100-listed firms have an average price-to-earnings (P/E) of 14. S&P 500 has an average P/E around 20.
So, specifically, I’m looking at UK banks, financial services firms and housebuilders, among others, in an effort to supercharge my portfolio. I want companies that are cheap versus their peers and stocks that are undervalued versus their intrinsic, or book, value.
For me, a great stock to enhance my portfolio’s growth rate is Barclays. It trades at 5.1 times earnings — below its peers — and DCF calculations suggest it could be undervalued by 70%. Noting a dividend coverage ratio of 4.25 — far above average — there’s definitely room to grow the dividend. The yield currently sits at an above-average 4.6%.
Of course, no investment strategy is a guaranteed winner, and the value of my investments could go down. But by buying undervalued stocks, where other investors are shying away from, instead of surging Nvidia, I’m probably less likely to lose out.
