The daily headlines in Britain can make grim reading: there has been constant news of fuel shortages, rising inflation and frictions over Brexit, while the pandemic is still with us. But take a closer look and the economic backdrop, from our perspective at least, doesn’t seem nearly so bad.
There has been an extraordinary increase in household savings through the pandemic; the housing market has remained strong; and jobs and wages have recovered rapidly and vigorously.
So it is no surprise that UK consumers’ confidence in their own personal financial situation recently hit a 14-year high. As such, we think there are tremendous opportunities in many UK-related stocks that are potentially being missed through all the doom and gloom.
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OSB Group – a highly profitable bank for a low price
One such stock is OSB Group (LSE: OSB), previously known as OneSavings Bank. Specialising in the professional buy-to-let (BTL) mortgage market, OSB is one of the fastest-growing, most profitable and well capitalised banks in the country. The outlook for the BTL market remains positive given attractive rental yields and high demand from tenants.
OSB’s book of outstanding loans grows at around 10% per year, and there is plenty of room for further expansion given it currently has only 5% of the market. Owing to the specialist nature of the lending, combined with an exceptionally efficient administration infrastructure, the bank makes a return on equity (a key gauge of profitability), of more than 20% most years. Yet the stock is currently trading on a price/book (p/b) ratio of 1.3.
Wickes – Home renovation on solid foundations
Another company that fits the bill is the UK’s second-largest home-improvement retailer Wickes (LSE: WIX). It used to be part of the Travis Perkins group but was demerged and listed on the London stockmarket in April 2021. It is a well balanced business spread across the three key areas of do-it-yourself (DIY), local tradesmen, and do-it-for-me (DIFM).
There are plenty of opportunities for growth as the nation continues to focus on improving its homes following the pandemic. The store estate is well invested, digital capability is strong and the operating model is highly efficient. Over 65% of sales start through digital channels but 95% are still fulfilled in-store. The current ten-times price/earnings (p/e) ratio looks far too low for the quality of the business and its ability to generate cash.
Marks and Spencer – not just any reinvention...
We are also excited by the transformation at high street stalwart Marks and Spencer (LSE: MKS). The food side of the business has been steadily improving, reducing the use of promotions and gradually taking market share over the last two years. The addition of the Ocado Retail joint venture in 2019 is also a positive development.
However, it is the improvement in the clothing and homeware side of the firm, accelerated in the pandemic and helped by the closure of high-street capacity elsewhere (Debenhams, for example), that offers the real potential for positive surprises. Profit forecasts for 2021-2022 were upgraded in the last update and we are hopeful of more to come. Investors, however, remain sceptical that improvement is sustainable: the stock is on a p/e ratio of 11.
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