Yahoo Finance Black Friday: Where can investors find great deals?
Black Friday might bring along a shopping bonanza but great deals are not limited to the high street. With the UK stock market still pretty much unloved, investors can also bag a bargain as “value” opportunities abound.
The investor mindset usually works in the opposite direction of a high street shopper. If prices are down, customers can’t resist a sale but if share prices tumble, alarm bells ring across markets and investors will start questioning their decisions.
However, savvy investors can find good deals the same way as Black Friday shoppers as weak share prices and low valuations present an opportunity to secure shares at bargain prices.
Where are the “value” opportunities?
Currently, the UK stock market is trading on a “significant valuation discount to global equities” with FTSE 100 shares trading on prices of around 10 times their 12-month forecast earnings, a third lower than their longer-term median level and also at a deep discount to global equities which are currently trading on 15.7 times forecast earnings.
“UK equities have been unloved by investors for some time, with significant outflows from UK equity funds on the back of gloomy economic predictions. But it is mistaken to confuse the UK stock market and economy as one and the same thing,” Jason Hollands, managing director at DIY investment platform Bestinvest, said.
Read more: UK inflation drop fuels hopes for interest rate cut
“The vast majority of earnings made by larger UK-listed companies are generated internationally and with better-than-expected inflation figures in both the US and UK in recent days, there is light at the end of the tunnel. A lot of economic bad news is already priced into UK share valuations,” he added.
Banks and energy companies are looking cheap for Hollands, who highlighted that no fewer than 102 companies in the FTSE 350 – excluding investment trusts – are trading on single digit 12-month forward multiples of less than 10 times their expected earnings over the next year.
Investment trusts to make things easier
But there are easier ways to find a bargain than cherry picking stocks. Investors can go with fund managers who focus on targeting companies they see as undervalued but with recovery potential.
“When choosing a fund manager that targets ‘value’ situations, we typically favour those who have spotted a catalyst for change at an unloved company, such as major restructuring initiative or a fresh management team at the top, that will eventually trigger a reappraisal,” Hollands said.
“Alternatively, another approach is to back fund managers who focus on assessing companies that are undervalued compared to their ‘intrinsic value’ rather than simply focusing on low price/earnings multiples,” he added.
Temple Bar Investment Trust (TMPL.L), Murray Income Trust (MUT.L) and Fidelity Special Values (FSV.L) are three examples of investment trusts that value situations and mainly invest in UK companies. All three are trading at lower prices than the value of their investment portfolios so investors should pay close attention to the opportunities in the investment trust market, according to Bestinvest.
Cheap isn't necessarily good
Unlike a Black Friday deal where you just get home and enjoy your latest purchase, investors looking to buy undervalued companies need to be patient and play the long game as prices will take some time to recover.
Investors also need to be cautious as they are not granted refund policies like high street shoppers. Cheap shares are an opportunity but those keen to grab a bargain but those interested need to look beyond a share’s low price and factor in the quality and outlook for the business. It could be that it is cheap for the wrong reasons.
Read more: UK economy flatlines but avoids recession
Hollands believes that the market will see more UK-listed companies engaging in what he calls “self-help financial engineering”, where companies use their cash to buy back and cancel some of their own shares.
“This can be incredibly powerful in boosting returns. Investment boutique Redwheel, who manage Temple Bar Investment Trust, point to the example of clothing retailer Next (NXT.L), which managed to deliver a total return for investors of 15.4% per annum (pa) between 2001 and 2021, a period when sales grew at 4.6% pa thanks to a share buyback programme which saw the number of shares in issue reduced by 60%,” Hollands said.
“50% of UK-listed companies have undertaken a share buyback over the last 12 months and there could be a lot more of this to come, especially as companies seek to stave off the risk of being snapped up on the cheap by overseas buyers,” he added.
Watch: Warren Buffett: Here’s how to invest like the Berkshire Hathaway CEO
Download the Yahoo Finance app, available for Apple and Android.
