Experts reveal the cut-price investments tipped to take off

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Black Friday this week will see shoppers bombarded with deals and offers. Some will be genuine bargains and worth snapping up while others will be attempts by retailers to offload old stock and dress up discounts to look better than they actually are.

The UK stock market is similarly riddled with what appear to be huge bargains. Many large, stalwart companies and funds are looking cheap and trading at discounts. But, as with Black Friday deals, all offers are not as they seem. Sometimes companies and funds are cheap for a good reason.

So if you want to bag a bargain this Black Friday that will grow – and not eat into your wealth – it may be worth rifling through the stock market’s cut-price rails. But as with any sale purchase, you still need to check that you really are getting a good deal.

What makes a company share look cheap?

When shopping for goods in the Black Friday sales, you can check if deals are any good by comparing the previous price with the sale one. You can also compare prices offered by other retailers. This approach is not a bad starting point for company shares as well. You can compare the share price to its historical average to see if it is looking more expensive or cheaper. You can also compare the price to other, similar companies.

Another simple, but blunt, tool often used by stockbrokers and analysts is a measure called the price earnings ratio. You can calculate this number yourself by dividing a company’s share price by the net profit it makes per share. Both numbers are easily found online if you’re investing in listed companies. The lower the ratio – often referred to as the p/e ratio – the ‘cheaper’ the company is because you are paying less for every pound of profit that the company makes.

Cashing in: As with any sale purchase, you still need to check that you really are getting a good deal

You can either calculate this measure using the earnings the company reported last year or using forward earnings predictions based on analyst forecasts.

If you apply this p/e ratio measurement to the FTSE 250 index of the 101st to the 350th biggest companies listed on the London Stock Exchange, some surprising household names appear in the bargain bin. The biggest name is Barclays, trading on a forward price earnings ratio of 4.3 times. This is less than half of the index average p/e ratio of just over ten times. Meanwhile, retirement income provider Just Group is trading on just three times earnings.

Other stocks that appear ‘cheap’ by this measure include less well-known companies such as Greek hydrocarbon exploration company Energean; power station group Drax, and two banks based in Georgia.

Will buying into cheap trusts be as effective?

Investment trusts are also a great place to rummage for a bargain, but the way you spot them is different than for shares.

These trusts are funds comprised of shares in a basket of companies, handpicked by a fund manager. They trade on the stock exchange so are easy to buy and sell. Investment trusts have two prices: one is the Net Asset Value (NAV), which is the value of all its underlying holdings. The second is the value as measured by its share price. If the NAV is lower than the share price, that is called trading at a discount. In other words, you can buy a share of the underlying holdings for less than they are currently worth.

And conversely, if the NAV is higher than the share price, it is called trading at a premium. If you buy at a premium, you are paying more for a share of the underlying holdings than they are worth.

It’s cheap…but is it really a bargain?

However, as with any purchase, just because something looks cheap doesn’t necessarily make it a good deal. There may be good reasons why a company’s share price has fallen or an investment trust is trading at a discount. Companies may be cheap because they are in unfashionable sectors, such as banking or energy, and could see their value bounce back once the negative sentiment dissipates. Others could be cheap because they have systemic flaws from which they may not recover.

Jason Hollands, managing director at investment platform BestInvest, warns that price earnings ratios and investment trust discounts alone can’t ensure you are getting a bargain. ‘Low valuations can be a sign that the prospects are poor, profit or dividend cuts are coming and even that the business could become a distressed situation where your capital is at serious risk,’ he says.

Unfortunately, there is no one simple formula or shortcut to working out whether cheap-looking investments are a steal or to be avoided. There is no substitute for good research.

Where the experts are going bargain hunting

Keith Bowman, equity analyst at investment platform Interactive Investor, starts his research by calculating a company’s average price earnings ratio over the past few years to see whether the current price is cheaper than usual. He then looks at analyst opinions on stocks and considers reasons why they might rise soon when deciding which are worth buying.

For example, using this method he notes that HSBC is trading at a forecast forward price earnings ratio of 5.8. This is both low compared with other large banks and also below its three-year average of close to 11 times earnings. ‘HSBC’s exposure to China is creating difficulties at the moment,’ says Bowman. ‘However, it is exiting less profitable regions.’

The shares are at £6.12, up nearly 30 per cent since this time last year.

Lloyds also makes the cut under this rationale, on a forward price earnings ratio of 5.5 times, compared with a three-year average of 11.5. Over a ten-year period, the bank’s forward price earnings ratio was an average of nearly 40, but that does not mean it will reach those dizzy heights again soon.

‘Lloyds is mainly UK-based, so its fortunes are tied to those of the UK economy,’ says Bowman. ‘If you think the British economy is due an upturn, this is one to buy.’

Dan Coatsworth, stock market analyst at investment platform AJ Bell, names Just Group as among UK companies whose share price looks cheap and could make for a good bargain.

‘Just Group sells annuities, which is a fast-growing market,’ he says. Just Group shares are down two per cent to 83p over five years.

Rob Burgeman, at wealth manager Brewin Dolphin, is keen on IAG, owner of British Airways. It is trading on a forward price earnings ratio of 4.7, and its share price has risen by 26 per cent so far this year. There are good reasons why IAG shares have remained in the doldrums, including the volatility of fuel prices and the need for travel to become more sustainable.

‘However, British Airways is a quality airline and the wider IAG group has other strong brands, such as Aer Lingus and Iberia, says Burgeman. ‘It also operates in the budget travel market through the airline Vueling.’

To spot bargain investment trusts, you need to find those trading at a discount that have blue skies ahead.

Coatsworth, at AJ Bell, believes that some trusts that specialise in smaller UK companies may be worth a look. ‘Small and medium-sized companies should be the first to recover once inflation is tamed and interest rate rises cease,’ he says.

The analyst also likes the Aberforth Smaller Companies Trust, which is currently trading on a 12.4 per cent discount and is up 31.4 per cent over three years.

Watts likes the European Smaller Companies Trust, managed by Janus Henderson’s Ollie Beckett.

He believes the discount of nearly 14 per cent – the deepest discount within its peer group – is due to poor market sentiment. However, the portfolio holds a good variety of assets.

How to double-down on the bargain

If you don’t want to pick individual stocks, you could consider a fund that targets undervalued companies. If you opt for an investment trust trading at its own discount, you can really double-down on bargain hunting.

However, remember that there is no guarantee that valuations will bounce back, and you could lose money if values have fallen further by the time you sell.

Coatsworth mentions Temple Bar investment trust, which invests in companies that are looking cheap by historical standards. For example, it invests in banks and energy shares and its largest holding is Marks & Spencer, which has seen a remarkable turnaround in recent years. M&S shares have more than doubled so far this year. Temple Bar itself is trading at a discount of 6.1 per cent.

Fidelity Special Values searches for small and medium-sized companies that look like bargains. Current holdings include tobacco giant Imperial Brands and Irish Bank AIB. The trust’s own discount is 8.4 per cent.

Murray Income, with a discount of 8.5 per cent, has top holdings including drug giant AstraZeneca, drinks brand Diageo and food and cosmetics group Unilever.

Unlike with your Black Friday shopping bargains, which will probably be delivered to you next day, you may have to wait for your reward with Black Friday investments.

Investors often have to wait patiently for the tide to turn so that unfashionable businesses come into vogue once again.

When they do, though, the reward could be far greater than any buzz you’ll get from online shopping.

Be bolder in encouraging share ownership in the UK – we’re British!

By Stephen Bird, Chief Executive of investment company Abrdn

Both the Government and Labour rightly want more money diverted into UK markets. But encouraging pension companies to invest in the UK misses half the story. The second half is how we encourage individual savers.

There are some important steps that would signal a real ambition to build a culture of saving and investing, which will become ever more vital in the coming years.

Stamp duty on UK shares is an obvious place to start. Investors are penalised for buying most British shares, and yet can invest in the US without this penalty. That’s as illogical and disproportionate as it is economically destructive (see Joanne Hart’s article, right).

In contrast, we have created a culture where home ownership is all too often seen as the only route to financial stability. There were stamp duty holidays to support home ownership under Labour in 2010 and again in 2020 under the Conservatives – and there are now reports that Jeremy Hunt is considering plans to reduce stamp duty on property purchases. Nice to have, certainly. But imagine if UK investors were given the same consideration on UK share purchases. It would be an important first step and signal that the Government sees share ownership as a habit worth supporting.

Abrdn has campaigned for a simplification of the Isa regime for some time and we are hopeful that some progress may be forthcoming. Having to make a choice between several different types of Isa wrapper is a huge barrier to entry, with an Isa regime perilously close to heading down the same road as our notoriously complicated pension system.

We also need to encourage greater pension contributions. We have argued that to avoid a future retirement crisis, we all need to be saving more.

We would like to see payments into people’s defined contribution pensions rise over time until they are eventually double their current level. There’s no doubt that the politics of this is difficult, but there aren’t many people in the industry who don’t believe that higher contribution levels is a nettle that will need to be grasped.

It is up to Government to incentivise the behaviour it wishes to see. Where else will long-term cash for the UK economy come from, if not long-term savers in the UK?

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