The bull market in stocks is in its 6th year now. Equities have enjoyed a stellar last few years and the FTSE 100 has almost doubled since the bottom of the financial crises. With stocks rising to new highs, it has become tricky to find companies that are still sold for good valuations. The FTSE 100 now has a PE ratio of 16 against a historical average of 15.
Having stated this, there are still some big blue chip companies trading at good valuations. Here is my take on 5 undervalued stocks in the UK at the moment:
1) Centrica (CNA) – The company runs British Gas and Scottish Gas. The company has just recently published quite weak 2014 results leading to an over- devaluation in the share price and making it undervalued. I think British Gas will recover from last years bad results and turn things around. The company has an economic moat as it operates in an industry with high barriers to entry. its nuclear energy storage business is something that is very hard to get into thus their is not much computation in this industry and Centrica is able to sustain its competitive advantage. The company is also currently yielding a very health dividend of 5.29%.
Current P/E: 13.3
2) Kingfisher (KGF) – The company is the parent of B&Q stores. This is a great opportunity for medium to long-term investors. Management are building on some of its competitive advantages and it’s actually the cost leader in its industry in Europe. Kingfisher appears to be superior to its main competitor here in the U.K. (Home Retail Group).
The stock is currently has a dividend rate of 2.85%
Current P/E: 16.8
3) Shire Plc (SHP) – Is a global specialty biopharmaceutical company. The share price has risen a very impressive 18% since the beginning of the year. And looking ahead, this upward momentum is set to continue as the company has very good growth prosects over the next fe years in comparison to other healthcare companies.
Current P/E 14.6
4) Lloyds (LLOY) – Analysts estimate that the Lloyds shares are set to earn double-digit return on equity this year. In conjunction to the increase in stock price, it is also forecasted that the stock will have a dividend rate of at least 4% by 2016. so as well as it being undervalued at the moment, it is also an attractive choice for dividend income hunters.
Although the company has had a troubled few years since the financial crises, it has really turned things around. The strong performance of the UK economy is also helping the financial services sector. The biggest problem with investing in banks at the moment is the uncertainty – investors don’t know when the next fine will be nor do they know when the next mis-selling scandal will hit.
Current P/E: 9.6
5) Prudential – Although this stock has a higher P/E ratio than the others, it is still a stock with great upward potential. Prudential has market positions in insurance and savings markets across Asia, which would be hard to replicate from scratch (barriers of entry). As these countries develop and grow over the next 20 years, the penetration of Prudentials products will rise with rising incomes and thus the shares will greatly benefit over time.
The stock is currently has a dividend rate of 2.90%
Current P/E: 16.9
As always, it is important to do your own research before buying a stock. Happy investing.