Three UK stocks from the bargain basement

Professional investor Richard Penny of the TM Crux UK Special Situations Fund, reckons UK stocks are as cheap as they've been for a long time. Here, he picks three favourites.

The UK stockmarket is cheap. The cyclically adjusted price/earnings ratio (Cape), which uses average annual earnings over the past ten years to smooth out the impact of the economic cycle, is very close to the level it reached in 2009 after the financial crisis. Historically, a Cape this low has flagged up double-digit annual returns over the next 15 years. Of course, the market could go lower before it goes higher, but in general we believe it is a market to buy for the long term.

The US, by similar valuation measures, is expensive and offers much smaller prospective returns. There is a reason for this: the US has much greater exposure to long-term, or structural, growth stocks such as Facebook, Amazon, Netflix and Google. The UK has very few large structural winners and those that have done well in recent years, such as Spirax Sarco, Halma and Games Workshop, change hands for around 40 times this year’s expected profits.

Mixing growth and value

Growth stocks have outperformed now for ten of the last 12 years and many of them are now looking unjustifiably expensive. We think investors do not have to make a choice between expensive growth and pedestrian value. Our predominantly mid- and small-cap approach seeks to buy out-of-favour long-term winners and smaller companies that often grow faster and have much cheaper valuations.

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One to consider is Whitbread (LSE: WTB). The Premier Inn budget-hotel group had a great recession in 2009, taking market share from weak competition. The same looks likely to happen this time. Budget hotels are the one sector of the hotel market that have seen long-term growth. Of course, hotels have recently been in lockdown and will take some time to return to a “new-normal” level of demand, but this is hurting competition such as Travelodge and independent operators. Whitbread has a very strong balance sheet with lots of freehold property and cash, and looks well placed to emerge from the downturn stronger. The shares have halved from recent highs and should recover nicely for patient investors.

An energy consultancy charging ahead

Inspired Energy (Aim: INSE), an energy consultancy, has an excellent record of helping firms find the best deals from energy utilities. Recently it has started to help firms save energy as well, a market that is twice the size. This should lead to faster growth and stronger relationships with customers; it will also burnish its green credentials. It boasts a financial record of steady growth and good margins, and the shares are very modestly valued. With growth accelerating and a growing interest in environmental stocks, we think Inspired Energy should do well in years to come.

MaxCyte (Aim: MXCT) is an American company listed in Britain. Its business making gene-therapy instruments is growing at 30% per annum and having a good lockdown. These instruments are used to boost the immune system in diseases such as cancer. MaxCyte also benefits from reaching financial milestones and from royalties on more than 100 drug-therapy programmes. Companies of this kind are out of favour in the UK, but highly prized in the US. MaxCyte intends to list in the US during 2021 and we believe this will lead to a rerating.

Richard Penny

Richard Penny has been managing the Crux UK Special Situations Fund for the past five years. Prior to this, he spent 15 years as a Senior Fund Manager at Legal & General Investment Management (LGIM) where he managed the award-winning L&G UK Alpha Trust and L&G UK Special Situations Trust In June 2021, Richard got awarded a AAA rating from Citywire. Richard studied Engineering and Economics at the University of Oxford and he now shares his expert knowledge on shares in our MoneyWeek share tips.