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P/E ratios of 10 and below! Are these cheap UK shares great buys for the economic recovery?

Royston Wild
·3-min read
UK investor holding smartphone and monitoring shares
UK investor holding smartphone and monitoring shares

These UK shares trade on rock-bottom earnings multiples right now. Are they brilliant bargains for the economic recovery? Or are they high-risk investor traps to be avoided at all costs?

#1: An electrifying selection?

It’s possible that Dixons Carphone (LSE: DC) could enjoy good earnings growth in the event of a strong economic recovery. City analysts certainly believe a solid bottom-line bounce is around the corner. They reckon the FTSE 250 stock will recover from a predicted 11% drop in annual profits in this financial year (to April 2021) with a 43% rebound in fiscal 2022.

This UK share certainly has plenty of fans. The boffins at Hargreaves Lansdown, for example, recently praised the retailer’s “jet-fuelled pivot to digital.” The FTSE 100 investment giant commented that “phenomenal growth online is shoring up the business [and] offsetting the effects of store closures.”

Man using credit card to pay online
Man using credit card to pay online

Weak margins and huge competition from the likes of Amazon are a concern, the investment giant says. But Hargreaves Lansdown reckons that the surge in flexible working (and the subsequent boost to those selling home office and tech products), along with signs of a turnaround at Dixons Carphone’s battered mobiles business, provide extra reasons to be cheerful for the long term.

Today the UK share trades on a low forward P/E ratio of 10 times. It could be argued that those competitive risks, allied with the threat that a no-deal Brexit and a long Covid-19 hangover pose to the British economy, are baked in at current prices. But I am happy to sit on the sidelines as the domestic economy toils.

#2: A better UK share for 2021?

I’d be much happier to invest in Springfield Properties (LSE: SPR) for 2021.

Firstly, City analysts expect the Scottish housebuilder to post strong and sustained earnings growth. Forecasts suggest a 50% bottom line rise in this fiscal year (to May 2021) and another 29% rise in financial 2022. Secondly, this leaves this UK share trading on an even-lower forward P/E ratio (of 9 times). And finally, Springfield also carries meaty dividend yields of 3.6% and 4.5% for this year and next respectively.

It’s hardly a shock that the number crunchers are predicting such heroic earnings growth. New-build demand is rocketing in Britain because of huge government support, low interest rates and a chronic shortage of properties in the existing housing pool. It doesn’t matter that a cloud hangs over the UK economy for 2021. These factors mean that Springfield’s product should keep selling like hotcakes.

These facts were illustrated in its latest trading update of last week. In it the UK share said that revenues for the six months to November were up 17% year-on-year. The business has a “strong” order book as well, the builder said, leading it to predict “significant growth for [the] full year.”

I reckon there’s plenty of scope for Britain’s housebuilders to deliver massive shareholder profits in 2021 and beyond. It’s why I myself own Barratt Developments and Taylor Wimpey in my own Stocks and Shares ISA. I’d happily add Springfield Properties to my portfolio too.

The post P/E ratios of 10 and below! Are these cheap UK shares great buys for the economic recovery? appeared first on The Motley Fool UK.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Royston Wild owns shares of Barratt Developments and Taylor Wimpey. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended Hargreaves Lansdown and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. 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 2020