The UK’s stock market has quickly and efficiently established a pecking order in the wake of the EU referendum vote.
Low-volatility stocks, defensives and dollar earners have generally done well, or at least much less badly, than cyclicals and, domestic plays such as retailers, banks and house builders. In addition, gold and silver miners have performed extremely well as investors have looked for a haven.
The question retail investors and professional fund managers will start to ask themselves after days of frenzied trading is which names now look oversold and a potential source of value.
After all, there is an old market saying that you can have cheap stocks and good news, just not both at the same time, and value hunters will be starting to assess just how much bad news has been factored into those stocks whose share price has been slammed, leaving their day-to-day operations under-appreciated and undervalued.
My take on five stocks which may start to flicker on the radar of value hunters and may be worthy of further research are below.
This is not to say they are guaranteed to bounce back – economic and earnings forecast downgrades have yet to start and these could flush out some fund redemptions, which can have a disproportionate effect on mid- and small-cap stocks – but all seem to have fundamentally sound business and come at what looks like a valuation that reflects a lot of bad news already.
Hill and Smith
Shares in the Wolverhampton-based engineer had at one stage fallen to around 20 percent below their £10 high for the year, but this could prove to have been an over-reaction.
It has not fallen as far as some, but that is because its day-to-day operations really should not be hit by the result of the referendum. Weakness in the pound against the euro and dollar are helpful, the balance sheet is sound and cash flow good and demand for its motorway crash barriers should be relatively immune to any major downturn in economic activity.
A forward price-to-earnings ratio of barely seven and a dividend yield of nearly five percent are interesting starting points.
Although the market is understandably concerned about the FTSE 250 firm’s buy-to-let exposure, demand from tenants for rental accommodation should be underpinned by the high prices which keep so many off the housing ladder.
The banking arm has just reported a maiden profit and management is buying back stock, which may suggest they think the shares have suffered too much.
Some strong long-term trends are unlikely to be knocked off course too badly by the uncertain political and economic environment and the UK’s demographics may be one of them, as the population grows older and lives longer.
FTSE 250 firm Saga provides insurance and travel services to the over-50s, whose spending power may be less affected by economic ups and downs. The shares offer a prospective yield of 4.4 per cent and come on a forward price-earnigns multiple of 14 to 15 times, which is not bargain basement, but looks attractive enough given what are potentially fairly dependable revenue streams.
Gold mining stocks have romped higher but some have been left behind and Shanta Gold has been a laggard.
Although junior gold miners are never for the faint-hearted this one could begin to catch up if gold prices continue to firm.
Shanta lost money last year but it has refinanced its debt to bolster its balance sheet, overhauled its management team, cut costs and worked to improve the efficiency of its flagship Tanzanian mine.
Again, this is not one for widows and orphans and any gold price retreat would be very unhelpful given the £44m-cap’s operational and financial gearing.
If you believe the UK is heading towards a recession it is worth looking at companies that could benefit from consumers ‘trading down’ from more expensive leisure activities.
Pubs certainly fit the bill, particularly as you can get really good quality food for much lower prices than fancy restaurants. Marston’s has been running pubs and brewing beer in various forms for more than 180 years, so it knows a thing or two about how to survive economic cycles.
The fact that it doesn’t compete in hot-spots like London is a positive if the City experiences a negative shudder from Brexit-related activity. It has a 5.5 per cent prospective dividend yield and is a favourite among pension funds who want to invest in a business with fairly steady earnings.