4 Cheap UK Stock Picks

The FTSE 100 has fallen in value over the past month, creating buying opportunities for savvy stock pickers. We reveal four undervalued equities

Emma Wall 13 February, 2018 | 12:25PM
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The blue-chip index of the largest 100 stocks listed in the UK hit an all-time high one month ago. Reaching a record level of 7,779 on January 12, investors in the FTSE 100 were riding a rally that has risen since the credit crisis lows of March 2009.

But the past month has seen a cooling of the UK stock market – even before the hiccup of last week, when a sell-off in the US rippled round the world, wiping billions of pounds of global market values.

Despite this sell-off, the FTSE 100 can hardly be called screaming buy. The FTSE 100 now sits at 7,182, higher than its pre-global financial crisis level, and higher than the pre-dotcom bubble level too. But that is not to say there are not undervalued stocks to be found within the index; any dip can reveal buying opportunities.

Morningstar equity analysts assign stocks a star rating based on expected returns, which assume that the stock´s market price and the analysts’ opinion of the fair value eventually converge. Under our system, three-star stocks are those that should offer a fair return, one that adequately compensates for the riskiness of the stock. Three-star stocks should offer investors a return that´s roughly comparable to the stock´s cost of equity.

The bigger the discount, the higher the star rating. Four and five-star ratings mean the stock is undervalued, while a three-star rating means it's fairly valued, and one and two-star stocks are overvalued.

When looking for investments, a five-star stock is generally a better opportunity than a one-star stock. Investors can use the Morningstar Rating for stocks to evaluate a stock’s true value.

According to Morningstar equity analysts, there are four UK stocks rated five stars under their coverage.

Babcock International Group (BAB)

Babcock is a British engineering company specialising in construction and decommission of nuclear power plants and submarines; maintenance support; fleet management for aviation, marine, and land; and provision of technical training and emergency services.

In 2017, Babcock employed more than 35,000 people worldwide and generated £4.5 billion in revenue. About 39% of revenue comes from marine and technology, 19% from defence, and 21% from support systems, while the international division generated the remaining 21% of sales.

Imperial Brands (IMB)

Imperial Brands is the world's fourth-largest international tobacco company with total fiscal 2017 volume of 265 billion cigarettes sold in more than 160 countries. The firm holds a leading global position in the fine-cut tobacco and hand-rolling paper categories and is a leading seller of cigars in several countries.

Recent acquisitions in the United States make Imperial the third-largest manufacturer in that market. Through its acquisition of Altadis, the firm has a logistics platform in Western Europe.

National Grid (NG.)

National Grid owns and operates the electric and gas transmission system in England and Wales. In March 2017 it completed the sale of a 61% stake in its U.K. natural gas distribution business. In the Northeastern United States, it serves 7.1 million electricity and gas customers combined in three states. It also owns regulated transmission and electricity generation in the United States, metering services, merchant transmission lines in the U.K., and the Grain liquefied natural gas facility.

United Utilities (UU.)

United Utilities Group is primarily a holding company for United Utilities Water, the country's largest regulated water and wastewater utility, serving customers in northwest England, including Manchester and Liverpool.

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
Babcock International Group PLC507.00 GBX-0.39
Imperial Brands PLC2,115.00 GBX-0.05Rating
National Grid PLC945.40 GBX-0.17Rating
United Utilities Group PLC Class A1,005.77 GBX-1.10Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar

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