Thanks to our all-too-human tendency to switch from fear to greed on a dime, the most despised UK shares in one year can quickly become the most desired in the next.
That’s why I’ve been looking at 2022’s biggest ‘losers’ as potential additions to my portfolio for when I have the spare cash to invest.
House market wobble
Housebuilders have endured an awful 2022 and Taylor Wimpey (LSE: TW) is no exception. Shares in the business have dropped like a stone.
This is all very rational. Why would house hunters commit to a purchase if they suspect prices are about to fall or now fear for their jobs? That’s right — most wouldn’t. And that’s why Taylor Wimpey investors are jumping ship.
I don’t expect the outlook to improve immediately. Indeed, I’d be gobsmacked if January’s trading update didn’t mention a further drop in sales and an increase in cancellations.
Bargain UK share
Nonetheless, there’s a lot I like here. Even taking next year’s 40%-odd expected reduction in earnings growth, the shares look cheap. The price-to-earnings (P/E) ratio for 2023 is nine. That suggests to me a lot of bad news is already factored in.
This isn’t 2008 either. By this, I mean that the balance sheets of many companies in the sector are far healthier than they once were.
This should mean that Taylor Wimpey can go on distributing dividends to its owners. As things go, the yield stands at a huge 9.2%! Even if a cut comes, what remains should still be more than sufficient.
I reckon a settling of interest rates at some point in 2023 could be the catalyst for a recovery.
Another ‘hated’ pick I like is one I already own, Scottish Mortgage Investment Trust (LSE: SMT). Like the other business mentioned here, it’s been unceremoniously dumped by many investors in 2022.
Again, I’m not about to say the market has made a mistake. Galloping interest rates are to growth stocks what kryptonite is to Superman because it becomes a lot more expensive to service the debt they’ve taken on to expand.
There are other, more company-specific reasons for the underperformance. The presence of Tesla in SMT’s portfolio, for example, hasn’t helped. I’m sure I’m not the only one hoping Elon Musk will concentrate on his electric vehicle company rather than Twitter in 2023.
As someone intending to stay invested for many years however, I’m far from downbeat. After all, a temporary decline like this presents as an unmissable opportunity to continue building my stake.
The track record speaks for itself. SMT was still up 61% in the five years to 23 December, made even more impressive by its relatively low 0.32% fee. Dividends excluded, the FTSE 100 index was down almost 3%.
Another attraction is that SMT operates in a completely different part of the market to the aforementioned Taylor Wimpey. Theoretically, this should mean that owning shares in both shouldn’t increase risk.
Sure, the period of historically-low rates we’ve enjoyed is now over. And yes, there’s nothing to stop a share price from falling further. But a pivot by the Federal Reserve on interest rates in 2023 will surely bring out the buyers.
When it comes, the rebound could be explosive.
Paul Summers owns shares in Scottish Mortgage Investment Trust. The Motley Fool UK has recommended Tesla. 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.
Motley Fool UK 2022