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Why I’m buying UK value shares like these, right now

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Kevin Godbold
·3-min read
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Man typing into calculator and making notes
Man typing into calculator and making notes

There’s been a bit of investor rotation from expensive growth stocks into cheaper value shares. The effect is most obvious in the US stock market because growth valuations rose so much higher. But we are seeing recent outperforming UK growth shares declining as well.

For example, high-flying stocks off their highs include UK names such as Experian, Games Workshop, London Stock Exchange, and Halma. Such beasts generally have quality operations, expensive valuations and a recent history of share price outperformance.

But a falling share price isn’t a good reason for writing-off a company as a potential investment. What really counts is the fundamentals of the enterprise, its forward-looking prospects and a valuation that makes sense of an investment in the shares. Perhaps every one of those names could go on my watch list waiting for a decent opportunity to pick up quality stocks at better prices.

I’m hunting for UK value shares like these

However, I’m hunting for value shares and finding some interesting opportunities right now. And that’s despite the progress the general stock market has made since the crash last year.

For example, I like the look of PayPoint (LSE: PAY), the retail payment services provider. The company’s payment platform and electronic point of sale (EPoS) equipment is in around 17,000 stores in the UK. And the company reckons it is making incremental progress with growth.

Meanwhile, with the share price near 590p, the forward-looking earnings multiple is in modest single-digits and the anticipated dividend yield is well above 5%. I think that valuation is undemanding.

However, PayPoint has a history of volatile earnings and growth ahead isn’t guaranteed. Although the valuation looks quite cheap, it has the potential to become cheaper, which could lead to a losing investment in the stock. Nevertheless, I’d be prepared to embrace the risks and hold some of the shares for the long haul.

Another opportunity that tempts me now is Premier Foods (LSE: PFD). The company has been in the process of turning its business around for some time. And the share price has risen a lot already to reflect the progress, which in itself is a risk for new shareholders now.

More to play for

But I think there’s more to play for in terms of recovery and growth over the coming years. However, City analysts expect a slight drop in earnings during 2021. And this company does not yet pay a shareholder dividend.

The brands looked tired and unloved for some time. Growth was elusive. And the company had way too much debt. But new management has injected some pizzazz into its offerings — names well-loved for many years, such as Homepride, Mr Kipling, Ambrosia and others.

And the strategy has been working. Earnings have been on the rise and received a particular boost in 2020 when lockdowns increased the popularity of home baking. Demand for Premier Foods’ products shot up because of that trend. However, there is some risk that the demand could fall away again as we emerge from the pandemic.

Nevertheless, the modest single-digit earnings multiple attracts me and I’d embrace the risks to hold the shares for their long-term potential.

The post Why I’m buying UK value shares like these, right now appeared first on The Motley Fool UK.

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK owns shares of Games Workshop. The Motley Fool UK has recommended Experian, Halma, and PayPoint. 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 2021