The Daily Telegraph - Saturday - Money
British stocks still cheap despite the vaccine rally
‘The UK’s prospects are now becoming extremely attractive to value hunters’
British shares have soared since the first breakthroughs in the development of Covid-19 vaccines, but there are still bargains around for savvy investors.
The FTSE All-Share, an index of London-listed companies, has surged by 26pc since early November, buoyed by a rocketing recovery in the shares of some of the businesses worst hit by the pandemic.
Shares in Cineworld, the cinema chain, are up by more than 300pc over the past six months, while Tullow Oil and Saga, the over-50s travel and insurance company, have risen by around 200pc.
As the London market has rallied, its shares have become more expensive, as measured by the price-to-earnings ratio, which shows how much shares cost as a multiple of company profits. British stocks now trade at 25 times their annual profits, according to FactSet, the data group, up from 19 before the vaccine breakthroughs.
Liam Pilbro of FactSet said: “Investors are starting to give serious attention to UK plc, with Britain’s prospects becoming increasingly attractive to value hunters on the back of economic optimism, driven largely by the vaccination programme.”
Despite the rally, there are still shares trading at cheap levels. Mr Pilbro said one way to find them was to examine the p/e of a company relative to its historical levels. “This is a useful way to show how ‘cheap’ or ‘expensive’ a stock is when used alongside further research on the outlook for a company,” he said.
Mr Pilbro pointed to a number of British shares trading at close to their lowest p/e ratios over the past decade, a sign they could be in bargain territory and worth further research.
Shares in Hargreaves Lansdown, the stockbroker, now trade at a p/e of 24, not far above 20, their lowest level over the past decade. Investors have fallen out of love with the company over its promotion of fallen star manager Neil Woodford and a series of share sales by Peter Hargreaves, its co-founder.
Nick Train of the fund group Lindsell Train said investors should be patient. “Hargreaves not only increased its final dividend in August but increased its interim payment by 6pc this year and it reported strong trading recently,” he said.
Shares in AO World, the online shopping group, now trade at a p/e of 66, which, while expensive relative to the broader stock market, is cheap compared with the shares’ much higher levels over the past decade and not far off a 10-year low of 58.
The shares soared during the pandemic but have lost a fifth of their value this year as investors switch their attention to companies that profit from the reopening of the economy.
For bargain hunters looking for shares at rock-bottom prices, Polymetal International could be a stock to watch. The gold miner has a p/e of 8, close to a 20-year low of 7, after a 20pc drop in its share price this year.
Other stocks trading at cheap levels include tobacco group Imperial Brands, whose shares trade on a p/e of 9, close to a 10-year low of 8, while shares in the outsourcer Serco trade on a p/e of 13, near their five-year low of 11.5.
However, p/e ratios should only be a starting point for investors. Chris Beckett of Quilter Cheviot, a wealth manager, said that while they were useful they did not give the full picture because they did not reflect, for example, how much debt a company had.
He added that a p/e based on the past year’s earnings may tell investors little about what a company will make in the future.
“Usually a very low ‘ historic’ p/e indicates that other investors do not consider current earnings to be sustainable. If you take a different view and are right, it will be a rewarding investment,” he said.