Investment Ideas: 10 Undervalued UK Stocks

Vote for Brexit, Project Fear threatened, and the stock market will tumble. And it was true – for a week. Since the end of June, the FTSE 100 index of blue-chip UK stocks have gone from strength to strength, hitting a 14-month high yesterday and sitting comfortably up 10% since the start of the year.

Granted, mid-cap and smaller companies have not fared as well, but they are also not held as widely by private investors; for those of you which have exposure to UK equity funds or individual stock holdings, the FTSE 100 tends to be the main event.

But with a rallying market, comes difficult investment decisions. Looking to get in now? Take the time to find a good quality stock at an attractive price. Value investing is the art of buying companies for less than their intrinsic value. It is Warren Buffet’s favoured method of stock selection – and when done successfully can guarantee double digit returns over decades. Using the stock screener in Morningstar Select, we have identified 10 UK stocks which are currently trading at less than the fair value assigned to them by Morningstar equity analysts.

Thanks to the recent UK market rally there are no stocks with a five-star rating at present, which would mean analysts consider them significantly undervalued. But there are 10 stocks with a four-star rating.

Supermarket Stocks

Tesco (TSCO) and Sainsbury's (SBRY) both feature in the undervalued list. The supermarket sector has faced increased pressure over the past couple of years as core customers have abandoned the big players for discount stores Aldi and Lidl. Brexit concerns have also supressed share prices as supermarkets are highly exposed to the domestic economy – if there is a downturn, more shoppers will seek out cheaper offerings.

Morningstar analyst Ken Perkins says that Tesco is his favoured supermarket stock. “There is clearly lot of risk that we see them facing, but we're encouraged that the traffic is going the right way and we think long-term, if they can get these things in the right direction, the dividend can grow and so can the stock price,” he said.

Financial Companies

Financial companies were hit hard in the wake of the Brexit vote as investors pulled cash from the stocks, concerned that they would no longer be able to operate in the single European market, losing their international competitive advantage.

Aviva (AV.), Barclays (BARC), Royal Bank of Scotland (RBS), Standard Chartered (STAN) and Lloyds (LLOY) are all currently considered undervalued by Morningstar equity analysts.

Last week, Morningstar equity analyst Stephen Ellis lamented RBS’ disappointing half year results, but said analysts would not be downgrading the stock.

“There was little positive news as the bank reported a loss of £2 billion due to another £1.3 billion in litigation and conduct costs, including another £450 million for payment protection insurance, or PPI, mis-selling,” he said. “The Financial Conduct Authority recently extended the deadline for PPI mis-selling compensation claims by a year to 2019, prolonging a painful episode for the U.K. banking industry, which has cost it £24 billion since 2011.”

Retail, Travel and Comms

Making up the basket of undervalued UK stocks are Burberry (BRBY), Carnival (CCL) and Sky (SKY). Burberry has had significant share price volatility over the past 18 months, thanks to a slowing Chinese economy – a key revenue source for all luxury goods, and changes in the management.

Gold rated Finsbury Growth & Income (FGT) manager Nick Train remains positive on Burberry, saying “there is only one Burberry, a company who is named unprompted on surveys on the world’s most recognisable brands”. Train has bought more in recent months, adding on the market dips.