Every month, we ask our freelance writers to share their top ideas for value stocks to buy with investors — here’s what they said for December!
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Associated British Foods
What it does: ABF is a highly diversified group with interests in food, agriculture, ingredients and retail.
By Andrew Mackie. With inflation far from tamed, interest rates at a 20-year high and the likelihood of a recession in 2024 growing, for me now is not the time to be chasing growth stocks with promises of riches in the distance future.
As a result, I have been trimming my positions in more speculative stocks and building a more defensive portfolio. One industry that I believe will hold up well next year is consumer staples. There are plenty of FTSE 100 companies in this space, but I particularly like Associated British Foods (LSE: ABF)
Despite it facing significant economic challenges, 2023 proved to be a successful year for the Group. Revenues across its grocery, ingredients and retail businesses were up low double digits. In sugar it was 26% higher, off the back of rising prices.
Indeed, it is the diversity of its operations which I believe is one of ABF’s key strengths. If the economy does slip into recession next year, this fact will be highly prised by investors.
Primark is one of the most respected retail brands on the high street. Margins have been squeezed here as a result of its decision not to pass on price increases, but lower material and freight costs will provide it with tailwinds next year.
Yes, the stock maybe up 50% this year; but investors underestimated the resilience of this business at the beginning of the year. I don’t think they will underestimate it again.
Andrew Mackie owns shares in Associated British Foods.
British American Tobacco
What it does: BAT is one of the world’s largest tobacco companies, owning brands such as Lucky Strike. In recent times, it has diversified into non-tobacco products.
By Charlie Keough. I’m already a British American Tobacco (LSE: BATS) shareholder. But with a price-to-earnings ratio of 6.5, I’m tempted to buy some more shares this month.
On top of its cheap value, the stock provides one of the most attractive dividend yields on the FTSE 100, coming in at 9%. Its raised its dividend annually for decades, including a 6% increase in 2022.
The biggest risk the business will face in the times ahead is the falling popularity of smoking as the transition to a ‘smoke-free’ world continues. We’ve seen this with the recent actions by the UK government.
Yet despite that, it still sold over 600bn cigarettes last year. And I think it’ll be some time before smoking is eradicated for good.
With the future in mind, its also began to place greater emphasis on non-cigarette income streams. These products are predicted to generate £5bn in revenue over the next few years.
It’ll face headwinds in the upcoming years. But with a low valuation and high yield, I’m a fan.
Charlie Keough owns shares in British American Tobacco.
Lloyds
What it does: Lloyds is the UK’s number one mortgage lender, but unlike many of its peers, doesn’t have an investment arm.
By Dr. James Fox. When I’m looking at UK-listed value stocks, I find it hard to look beyond Lloyds (LSE:LLOY). Shares in the high-street lender trade at just 4.5 times TTM (Trailing 12 Months) earnings and 6.1 times forward earnings.
It’s also worth highlighting that the average target price for Lloyds is 60p, that’s around 45% higher than the current share price. Such a large discrepancy is unusual.
Banks are cyclical stocks, and investors may be concerned about the impact of higher interest rates and a recession on credit losses.
However, while a deep recession and sharp movements in interest rates wouldn’t be good for Lloyds, most analysts believe investors’s concerns are overplayed.
Moreover, Lloyds has a price/earnings-to-growth ratio of 0.5, inferring that earnings growth over the coming years hasn’t been priced in.
One major tailwind is likely to come in the form of hedging, with banks buying up fixed-interest assets as rates peak. This hedging strategy should deliver £5bn in gross income in 2025 alone.
James Fox owns shares in Lloyds.
