UK shares have fallen in recent weeks. In fact, the FTSE 100 is down around 6% over a month, while the FTSE 250 has fallen 7%. But some sectors have fared worse than others. The main casualty has been financial stocks.
So let’s take a closer look at why this might be a once-in-a-decade opportunity to buy UK shares.
Stocks tumble, but why?
Stocks have tumbled over the past month, triggered by a collapse of Silicon Valley Bank. The fall of the tech-financier led many investors to worry that other banks were sitting on huge unrealised bond losses.
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Concerns about the health of the global finance sector were worsened by Credit Suisse and its eventual buyout by UBS. As a result, bank stocks have suffered, and other sectors have followed.
But many analysts are saying that the sell-off in banking stocks is unwarranted. After all, SVB and Credit Suisse are fairly unique. The former had less varied bond portfolio than most big banks, and greater exposure to riskier tech markets. The latter had faced scandal after scandal.
As such, the resultant 20% fall in the value of Barclays, among other well-regulated and secure banking shares, should be viewed as an opportunity. For one, it’s the quality of bank loans and safety of their deposits that matter most.
These types of opportunities don’t happen all that often. After all, this correction was caused by fear and not by any changes to the business environment or performance concerns.
It’s very rare that we get an opportunity to buy a blue-chip stock at a 20% discount versus two weeks previously. And the thing is, banks tend to be pretty steady. They’re cyclical stocks, but there have only been two banking crises in the 21st century that have impacted UK banks. This really could be a once-in-a-decade opportunity.
Very attractive valuations
Sometimes, share prices fall for good reasons. So I need to make sure I’m not just buying stocks that appear cheaper than they used to be. This stock market correction is a rare opportunity to buy meaningfully undervalued shares.
Picking undervalued stocks isn’t always easy and it does require research. I can start by looking at simple near-term metrics such as the price-to-earnings (P/E) ratio or the EV-to-EBITDA ratio. These are by no means perfect ways to value companies, but by comparing these metrics among stocks in the same sector, we can develop an idea as to which ones may be best value.
Then there are more complex metrics such as the Discounted Cash Flow (DCF) calculation. This requires us to make forecasts about a company’s future cash flow over 10 years, and that can be challenging. But the result can be worth it.
For example, a DCF calculation suggests that Barclays is undervalued by a whopping 73%. Combined with the fact that Barclays trades with a price-to-earnings ratio of just 4.4, way under the FTSE 100 average of 12 and below its peers, I’m confident the stock is a great buy.
But it’s not just banks. A host of stocks have been pushed downwards, but I’m focusing on hard-hit financials. I particularly like Hargreaves Lansdown. It trades with P/E of 15, but for a tech-cum-finance business, I don’t think that’s expensive. Right now, it’s making a fortune on interest on client deposits.
