UK shares look cheap — but the market might be about to take notice
UK shares have been trading at discounts to their US counterparts for some time. And I think the opportunities these present are too cheap to ignore.
Iâm concerned, though, that the chance to buy UK stocks at bargain prices might be slipping away. Thatâs why Iâve been buying them for my portfolio.
Contrarian investing
Outperforming the stock market over the long term is hard. But it becomes impossible for investors who donât have some sort of view thatâs different from the general consensus.
That doesnât have to be a radically unorthodox thesis. It just has to involve thinking that some stock â or class of stocks â is being underestimated by the majority of investors.
In my case, thatâs UK stocks. In a lot of cases, I think there are shares trading at prices that are well below the intrinsic value of the underlying businesses.
This is actually a view that quite a lot of investors agree with. But they object that discounted valuations have been around for a while and things arenât showing any sign of changing.
Unlocking value
I think there are three things to say in response. One is that several UK companies have been the subject of takeover bids, which implies investors are starting to take notice.
Another is that more and more firms are using their excess profits for share buybacks. That increases the number of buyers in the market while also boosting future earnings growth.
Lastly, the UK government is starting to encourage people to begin investing, rather than keeping cash in savings. And this could also increase demand in the market.
Nothingâs going to change overnight, but I think there are some powerful forces behind UK shares. But if Iâm right, the opportunities available at the moment may not be around forever.
A UK bargain?
One of the most interesting examples Iâve seen recently is Jet2 (LSE:JET2). The company has a market value of £2.75bn, but after subtracting £2bn in net cash it looks ridiculously cheap to me.
With numbers like that, the firmâs balance sheet is worth a closer look. While it does show £3.35bn in cash and £1.27bn in debt and leases, thereâs something else for investors to look at.
Jet2 also has around £1.3bn in deferred revenues. In other words, this is cash it has collected upfront for flights and holidays it has to deliver on this year.
That adds to the firmâs cash on hand, but doesnât show up as debt. But I think investors need to factor this in â and adding it back means the companyâs enterprise value roughly triples.
Value hunting
I think the UK is a great place to look for undervalued stocks to buy â and thatâs what Iâve been doing in my portfolio. And I donât expect the current opportunities to be around forever.
Investors, though, do need to look closely at what theyâre buying. It’s important that value stocks really are cheap and don’t just look that way at first sight.
Jet2 is a good business in a strong financial position that may be worth considering. But when it comes to UK shares, I think there might be even better value opportunities to think about at the moment.
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Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
