The strategy employed by Temple Bar is known as value investing. This is the process of buying a company’s stock for less than its true worth, or intrinsic value. By buying at a discount, this strategy builds in a “margin of safety”: while in the short term an undervalued company’s share price might fall further, in the long run the built-in value should ultimately be recognised by other investors, prompting the share price to rise to reflect the stock’s intrinsic value. There is much empirical evidence to show that value strategies have outperformed stock markets over the longer term.
Of course, some companies are cheap for a good reason, but we believe investments in good-quality yet undervalued companies with strong cash flows and robust balance sheets offer the best potential for attractive long-term investment returns.
Three British stocks worth adding to your portfolio
Although Aberdeen Group (LSE: ABDN) has been known as an asset manager for many years, the company has in fact managed to diversify and now operates three different businesses: Investments asset management; Adviser, a business-to-business (B2B) division; and interactive investor (ii), a trading platform for consumers. Aberdeen’s B2B business is the UK’s second-largest platform offering advice, measured by assets under management; and ii is the UK’s second-largest direct-to-consumer investment platform.
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The group appointed a new CEO in 2024 to help make the firm more profitable. We estimate that a restructured Investments business within Aberdeen could be worth an additional £1.5 billion, and therefore see a potential restructuring as a free call option embedded in today’s valuation. There are also financial assets worth £2.1 billion on the balance sheet. Combining our estimated intrinsic value of the three businesses with these financial assets, we deem the shares significantly undervalued.
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Smith & Nephew (LSE: SN) is a medical-devices business. It has struggled for some time, losing market share in its key orthopaedics business and suffering from poor levels of productivity. There is now a 12-point plan in place to drive financial improvement. If successful, it could lead to higher sales growth, productivity improvements, expanding margins, and higher cash flow and shareholder returns. In the last 18 months, there have been clear signs that the turnaround is working, as the company has delivered annual sales growth of more than 5% and an expansion in margins. We believe that Smith & Nephew is a high-quality business with strong market positions in relatively stable but growing markets, and we expect meaningful growth in profits in the medium term.
Johnson Matthey (LSE: JMAT) is a speciality chemicals business. JMAT has historically delivered a stable level of sales and underlying operating profit. In recent years this consistency has been impeded by investments in hydrogen. Concerns around hydrogen, a decline in prices of platinum-group metals and the transition to electric vehicles have led to a derating in the stock. Management have since recognised the risk of pursuing growth in unproven technologies and have shifted their focus toward maximising cash flows and shareholders’ returns.
At the time of its results in May, JMAT announced the sale of its Catalyst Technologies division for £1.6 billion and an intention to return 90% of the proceeds to shareholders. This division accounts for just 25% of the company’s profits and yet the sale’s proceeds made up two-thirds of its market value at the time of the announcement. The shares responded favourably on this news. We believe that the shares remain significantly undervalued.
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