Bargain British stocks with long-term potential
Three British stocks with plenty of long-term potential, according to Ian Lance, co-manager of Temple Bar Investment Trust
As value investors, we believe that the average market participant overreacts to short-term news – often related to earnings – which often has little or no impact on the long-run intrinsic value of the underlying business. We have also historically found underpriced securities in sectors deemed “uninvestable”. Many investors are still scared of banks thanks to the 2008 crisis, or avoid airlines because of the industry’s poor long-term record. If large parts of the market are unwilling to look at a particular industry regardless of valuation, then we are more likely to find mispriced securities.
Bargain British stocks to invest in
The tide went out for Standard Chartered (LSE: STAN) in 2014-2015 following the global commodities bust. The price/book value fell from three to 0.5. This led to a new (ex-JPMorgan) CEO, Bill Winters, and a long process of ridding the bank of bad loans, changing the underwriting culture and streamlining the sectors and countries the group operated in.
Today the company generates two-thirds of its profits from corporate, commercial and institutional banking and one-third from consumer, private and business banking. Over 80% of profits are generated in Asia, and the remainder in Africa and the Middle East. The bank is now sensibly run and the results have followed.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Return on equity last year was 10% and management’s goal is to reach 12% by 2026. The tier-1 capital ratio is now nearly 14%. The board is targeting net interest and other income growth of 5%-7% per annum, which they beat handily last year but would consider a healthy rate of longer-term growth. Despite all this progress, the stock trades at less than 0.7 times tangible book value.
International Airlines Group (LSE: IAG), the owner of British Airways, is one of the largest airline groups in the world and one of the “big three” European aviation operators. It operates in the passenger airlines, cargo and loyalty businesses; and it has a particularly strong foothold in the profitable transatlantic market. With its partner, American Airlines, IAG commands a 58% market share of traffic between Heathrow and the US.
Given the quality of the management team alongside the reinforced balance sheet, we view the company’s valuation as highly attractive. IAG has delivered impressive and growing profitability over the past decade, except in the Covid years. The shares trade on six times earnings and a free cash flow yield of over 10%. IAG has previously shown a willingness to return capital to shareholders, paying out 40% of today’s market value in dividends and buybacks in the five years to 2020. The company has just reinstated its dividend.
M&S is back in fashion
Marks & Spencer’s (LSE: MKS) fortunes have waxed and waned in the last two decades. They finally changed for the better in 2017 when Archie Norman was appointed chair. He had already turned around Asda. At M&S he replaced 50% of the senior management; remade the store portfolio, with brighter stores in better locations; and updated the clothing lines for modern and younger customers.
In food, the board kept the premium positioning but broadened the offering to suit a weekly shop. After years of neglect of the online arm, the board crafted a digital strategy that has made M&S one of the top online retailers in the UK. They took out about £300 million in annual operating costs at the same time.
These efforts started to bear fruit in 2023, when the group started taking market share in food, and clothing and profits exceeded forecasts. The stock has bounced from £1 to over £4 in two years but we think it is still undervalued relative to its long-run earnings potential.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
-
Singapore Technologies Engineering shows strong growth
Singapore Technologies Engineering offers diversification, improving profitability and income
By Dr Mike Tubbs Published
-
Baillie Gifford trusts gain from SpaceX valuation
Baillie Gifford's funds have gained from Elon Musk’s relationship with US president-elect Donald Trump. Are private investments really a safe bet?
By Rupert Hargreaves Published
-
Cash in on China’s long-term growth with three competitive stocks
Dale Nicholls, portfolio manager of the Fidelity China Special Situations Trust, highlights three Chinese companies with scalable growth potential
By Dale Nicholls Published
-
MoneyWeek's trading tips - how did they fare in 2024?
My tips have yielded a profit and the open positions are proving lucrative, too
By Dr Matthew Partridge Published
-
Share buybacks rise in the UK – what effect will it have?
Share buybacks are gaining popularity in the UK – good news for investors
By Rupert Hargreaves Published
-
Should you bet on US stocks?
You don’t have to be bearish on US stocks to worry that they are now such a large share of global indices
By Cris Sholto Heaton Published
-
Is now the time to buy Marshalls?
Former market darling Marshalls, a landscaping and building products supplier, looks too cheap. Is it time to buy this once-admired stock?
By Jamie Ward Published
-
Top UK stocks with healthy cash flows and dividend yields
Three promising UK stocks according to Alan Dobbie, co-manager, Rathbone Income Fund
By Alan Dobbie Published
-
Invest in Grainger: a landlord with growth potential
Grainger is putting years of uncertainty behind it and investing for expansion
By Rupert Hargreaves Published
-
UK equities are set for a bull market – buy now
Investors shouldn’t wait for a crisis to buy UK equities, says Max King. Do so now, in the expectation of much better returns in due course
By Max King Published