As the outlook for the UK economy continues to improve, I’ve been searching for value stocks to add to my portfolio. Here are three top value stocks I’d buy over the next few weeks.
Value stocks for May
The first company on my list is Just (LSE: JUST). Shares in this financial services firm have been trending higher over the past 12 months. However, despite this performance, the stock is still trading at a price-to-book (P/B) value of less than 50%. Moreover, it’s selling at a price-to-earnings (P/E) ratio of just 6.6, compared to the financial services industry median of 12.5.
I think both of these figures look cheap. As the UK economy reopens over the next few months, I reckon the demand for Just’s services could rise, which may help improve investor sentiment towards the business. This could push the stock higher.
The company’s valuation and growth potential are the two primary reasons I’d buy Just for my portfolio of value stocks today. The immediate risk facing the business is the potential for more regulation. This would increase costs for the enterprise and reduced profit margins. Another wave of coronavirus may also disrupt consumer sentiment, impacting sales.
Defensive investment
Another company I’d buy for my portfolio of value stocks is Morrisons (LSE: MRW). While this supermarket retailer’s sales increased last year thanks to a temporary coronavirus uplift, profits plunged due to higher costs.
This is expected to change in its current financial year. Profits may recover to pre-coronavirus levels. As of yet, the market doesn’t seem to have factored this into Morrison’s valuation. The stock is dealing at a P/E of 12.8 compared to the market median of 16.6.
Of course, these projections could change at any moment. But I believe they show the retailer’s growth potential. The business’s main risk is the potential for a sudden increase in costs, either due to another wave of coronavirus or a minimum wage hike. These challenges could hurt its ability to return to growth in its current financial year.
Growth potential
Another company I’d add to my portfolio of value stocks, where I believe the market hasn’t yet correctly assessed its growth potential, is BT (LSE: BT.A).
Based on current City growth projections, shares in BT are currently changing hands at a 2022 P/E ratio of just 7.8. I think this looks cheap considering the fact net profit is expected to increase from £1.7bn in 2020 to £1.9bn by 2022.
Analysts also believe the company will reinstate its dividend next year, with an initial yield of 4.8% expected.
The company may or may not live up to these projections. In fact, I think the organisation should probably hold off on its dividend until it has reduced debt to a more sustainable level.
BT has nearly £20bn of borrowings, and getting this debt mountain under control is one of the biggest challenges management faces. If interest rates on this debt suddenly increase, the company’s outlook may change very quickly.
Despite this risk, I’d buy the company for my portfolio of stocks today.
