5 Undervalued UK Stock Picks

The Morningstar Fair Value Estimate tells investors what the long-term, intrinsic value of a stock is. So which UK stocks are trading at less than their fair value?

Emma Wall 24 July, 2017 | 3:50PM
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The FTSE 100 has rallied 14% over the past year, up 3.4% year to date. The unloved stocks of the past couple of years have seen gains – with energy stocks up last year, and financials rallying too. So where are the pockets of value left?

The Morningstar Fair Value Estimate tells investors what the long-term, intrinsic value of a stock is, helping them see beyond the present market price. Morningstar calculates the fair value estimate of a company based on how much cash we think the company will generate in the future.

When determining the fair value estimate, Morningstar also takes into account the predictability of a company’s future cash flows - the uncertainty rating. A stock with a higher uncertainty rating, requires a larger margin of safety before earning a four or five-star rating.

Despite the considerable rally in UK equities over the last year there are still bargains to be had. There are 17 undervalued stocks in the UK, according to Morningstar equity analysts. We highlight five below.

Barclays (BARC)

With headquarters in London, Barclays is the second-largest U.K. bank by asset size and is a trans-Atlantic consumer, corporate, and investment bank. The bank operates via two main divisions: Barclays U.K. and Barclays International.

Barclays U.K. includes the personal banking, Barclaycard, and wealth, entrepreneur, and business banking. Barclays International includes the corporate and investment banking and consumer, cards, and payments segments in Europe and the U.S. Barclays U.K. serves as the group’s ring-fenced business.

GlaxoSmithKline (GSK)

In the pharmaceutical industry, GlaxoSmithKline ranks as one of the largest companies by total sales. The company wields its might across multiple therapeutic classes, including respiratory and antiviral, as well as vaccines and healthcare-related consumer products.

Sainsbury (SBRY)

Founded in 1869, J Sainsbury is the second-largest U.K. grocery chain with a 16.5% market share. It operates over 600 supermarkets and nearly 800 convenience stores, all in the U.K., with 90% of sales generated by supermarkets. The company has diversified away from core food by selling clothing, telecom equipment, and other non-food items.

In September 2016 it took a step further into non-food retailing with the purchase of Home Retail Group, operating the Habitat and Argos chains, for £1.1 billion. It has operated online sales since 1997.

Rio Tinto (RIO)

Rio Tinto searches for and extracts a variety of minerals worldwide, with the heaviest concentrations in North America and Australia. Iron ore is the dominant commodity, with meaningful contributions from aluminium, copper, diamonds, energy products, gold, and industrial minerals.

The 1995 merger of RTZ and CRA, via a dual-listed structure, created the present-day company. The two operate as a single business entity. Shareholders in each company have equivalent economic and voting rights.

Smith & Nephew (SN.)

Smith & Nephew designs, manufactures, and markets orthopaedic devices and wound-care solutions. Approximately three fourths of the U.K.-based firm's revenue comes from knee replacements, hip implants, nails, fixation devices, and arthroscopy tools.

The remaining 25% of revenue is from the wound therapy segment. Roughly half of Smith & Nephew's total revenue comes from developed European and Asian markets, 40% is from the United States, and emerging markets account for the remainder.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Barclays PLC199.24 GBX-3.07Rating
GlaxoSmithKline PLC1,647.20 GBX0.65Rating
Rio Tinto PLC5,457.00 GBX-2.20Rating
Sainsbury (J) PLC283.70 GBX-1.18Rating
Smith & Nephew PLC1,258.50 GBX-1.22Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar