When it comes to identifying the best shares to buy and hold for the long term, there are a few things I need to consider.
Do I want to target to growth stocks? Do I want to invest for income? Or do I want to implement a value investing strategy?
You may be asking why such questions are even necessary, but it’s often been the case that different periods in the market yield varying degrees of success for value and growth stocks.
For example, growth investing has long been thought to be a superior strategy to value investing. Will it stay that way forever?
The appeal of UK value stocks
Well, nobody can answer that question for sure. Nevertheless, last week, a Financial Times article outlined why UK value stocks could be the trade of the decade.
After the outbreak of Covid-19 and Brexit uncertainly, the article points out that many British stocks are compelling. That’s even after the rebound.
What is more, as many of their US counterparts led a strong bounce back, UK shares were seemingly left behind.
While concerns such as Covid-19 and Brexit remain tangible risks even today, my focus is on the long-term outlook. A combination of the mass rollout of vaccination programmes and post-Brexit trade deals leads me to believe that in the long run, UK equities should remain an appealing proposition.
With valuations comparably lower relative to other developed world markets, UK value stocks could present a lucrative opportunity for me to realise some serious gains over the coming decades.
What should I be looking out for?
Deciding to implement a value investing strategy is the easy part. Next, I need to determine which UK stocks satisfy the criteria and represent worthwhile investments.
In most cases, this means looking out for companies whose share prices represent a bargain.
That’s not to say that I should be buying shares simply because the company’s valuation has fallen. After all, a company may be in serious trouble and in danger of going bust.
Rather, I need to be on the hunt for companies whose shares appear to be trading below their intrinsic value.
With that in mind, I pay close attention to key metrics such as the price-to-earnings ratio (P/E), debt-to-equity ratio (D/E), and the price-to-book ratio (P/B).
Studying each of these measurements should enable me to paint a clear picture of whether the market appears to have undervalued a certain stock.
One UK stock on my watchlist
In my eyes, one British company that satisfies this criteria is Aviva.
The multinational insurance company trades on a forward P/E ratio of around 7 and boasts an attractive dividend yield of 6.8%.
Making significant headway in its strategic restructuring, the company beat last year’s market expectations in what was a successful 2020. As such, the company appears well-positioned to carry this momentum forward throughout 2021.
That said, as my colleague Edward Sheldon points out, Aviva lacks a clear competitive advantage, which could inhibit its ability to outperform its competitors over the long term.
On the whole, however, Aviva shares appear undervalued in my eyes, explaining why they’re firmly on my watchlist of UK value stocks to buy.
