Yahoo Finance Cheap UK shares are now prime bid targets for bargain-seeking investors
The UK stock market is dirt cheap. While practically every other major index has risen by over 50pc in the past five years, the FTSE 100 and FTSE 250 are up by just 14pc and 11pc respectively over the same period.
Although many investors have expressed their concern and frustration with the dire performance of their UK-listed holdings, Questor believes it is a temporary phenomenon.
After all, an improving outlook for the UK economy means low share prices are destined to attract heightened demand from investors that, over time, will erase any valuation discrepancies vis-à-vis other indexes.
Indeed, UK-listed stocks have become prime targets for takeovers. Smart Metering Systems (SMS), which owns smart meters and rents them out to utility companies, is the latest example. It has agreed to the terms of an all cash acquisition by Sienna Bidco, which is a newly formed company owned by funds advised by Kohlberg Kravis Roberts & Co, that amounts to 955p per share.
This represents a 40pc premium to the stock’s price on the day prior to the acquisition announcement. It means we have generated a 9pc gain on our notional holding in the stock, which was added to our wealth preserver portfolio in July 2021. Over the same period, the FTSE 100 has risen by 7pc.
Although index outperformance is undoubtedly a positive end result, we feel SMS had the potential to generate substantially higher returns for the portfolio over the long run. Its latest half-year results showed it was making encouraging progress in implementing its strategy, with a large contracted order pipeline and the prospect of expanding into other areas set to catalyse its share price.
That said, the acquisition values the company on a heady price-to-earnings (P/E) ratio of 60. Since it would most likely have taken several years for the stock to ultimately deliver on its potential, the acquisition is good news for our portfolio.
With shares in SMS currently trading at or around the acquisition price, they will now be “sold” and removed from our wealth preserver portfolio. The company will immediately be replaced with AstraZeneca, which is set to outperform the wider stock market and generate capital gains that are significantly higher than inflation over the coming years.
The pharmaceutical firm has an excellent track record of growth. Its shares have risen by 42pc and beaten the FTSE 100 by 35 percentage points since this column first tipped them in August 2019, while its bottom line has grown at an annualised rate in excess of 9pc over the past five years.
Its earnings are forecast to increase at a double-digit rate in the current year, according to guidance included in the company’s latest quarterly results. This suggests its P/E ratio of 20 offers good value for money at a time when similar growth rates are proving elusive for many UK-listed stocks.
As with any pharmaceutical company, AstraZeneca’s future financial performance is highly dependent on the quality of its pipeline. Although it is impossible to know how successful its drugs in development will prove to be in terms of their ultimate sales figures, its strong financial performance means it is able to invest heavily in research and development (R&D) and make acquisitions for future growth.
For example, it raised R&D spending by 5pc in the most recent quarter. It has a diverse pipeline that contains 167 projects, with them focused on conditions such as cancer that are extremely likely to become more prevalent as the world’s population grows and ages. And with a solid financial position, the firm has the capacity to sustain high investment in its pipeline even during periods of economic difficulty.
Indeed, AstraZeneca is a defensive stock that is far less affected by economic undulations than the wider FTSE 100 index. Its exposure to a broad range of developed and emerging markets provides additional stability, as well as potential growth catalysts as incomes rise across the developing world.
This potent mix of defensive attributes and growth characteristics means the stock is a worthwhile addition to our wealth preserver portfolio. Its attractive valuation, solid balance sheet, strong pipeline and exposure to obvious growth opportunities equates to an appealing risk/reward ratio and significant inflation-beating potential.
Questor says: buy
Ticker: AZN
Share price at close: £104.68
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