Why Shell shares are cheap and you should buy today

WITH UK stock markets continuing to sit around record highs, it has become difficult for savers to buy shares in their favourite British brands without paying blisteringly high prices.

But by ignoring noise and short-term market-moving events such as central bank meetings and consumer sentiment surveys, Goldman Sachs believes punters can still find value in certain pockets of the Footsie. Key to this is identifying market trends which are working in a stock’s favour while also finding companies that operate in a more efficient way than their peers.

Investment bank Goldman has highlighted three unconventional stocks which its analysts believe could rise sharply in the next year, as well as one popular stock it sees as being overplayed by the market.

Royal Dutch Shell is no doubt an unlikely choice for a value stock but it is currently in the process of delivering projects, and Goldman said many of the oil supermajor’s biggest plans could go live before 2018.

Against a wider backdrop of falling costs and simplified tax regimes for international oil companies, Goldman believes Shell’s operating expenses could fall by up to 25pc as it continues to cut costs and sell assets. Goldman said this will strengthen Shell’s balance sheet and raise free cash on its books, restoring the market’s confidence in its dividend sustainability after years of doubt stemming from weak oil prices.

Shares of energy services group Hunting have suffered a 31pc decline so far this year. Despite strength in the US due to buoyant shale activity, Hunting has been hit everywhere else by the weak oil price.

But with profits expected to rise in the second half, Goldman believes it is time to invest, as Hunting provides an attractive way for Europeans to benefit from a recent spate of oil well completions in the US.

Goldman said Hunting is a good way to invest in a recent recovery in shale activity, with around 65pc of its revenue generated in the US. Associated British Foods is a funny old company, owning food and drink brands such as Ovaltine and Ryvita, but also Primark.

Rather than any strength in ABF’s food business, Goldman’s ‘buy’ recommendation is driven entirely by its belief that the budget clothes chain – its sole retail brand – will soar.

After three years of low growth against the tough retail environment which has hit most High Street names, ABF reported strong summer sales at Primark earlier this week, confounding analyst expectations.

Analysts have even forecast a return to double-digit earnings growth at Primark, adding that the development of an online store and click-and-collect option could boost the store’s prospects even further.

AS WITH all markets there are stocks to avoid, and the noticeable one on Goldman’s ‘sell’ list is Astrazeneca. The pharma giant has remained fairly chipper recently despite the failure of the first leg of its Mystic lung cancer treatment in July, which led shares to fall 15pc.

Despite acknowledging the progress Astra has made on other cancer treatments, Goldman believes it remains too optimistic on the sales outlook of its drugs pipeline.

With little room for error, Goldman also sees limited room for dividend growth, leaving shares looking rich at current valuations.