This morning (20 December) we got the latest UK inflation reading. From October’s 4.6%, prices for November rose by 3.9% year-on-year. This marks a sharp fall, bringing some positive sentiment to value stocks. The FTSE 100 is up 0.8% so far today on the news. If this rally continues, these are the stocks I think could do the best.
Why value makes sense
The reason I’m focusing on value shares is because they can be very sentiment driven. Fundamentally, a value stock is one that’s trading below where the long-term fair value is.
Sometimes this can be because investors in general aren’t feeling positive about the market in general. This can cause them to buy defensive stocks instead, rather than turning to unloved companies.
On the other hand, when things are looking more rosy (helped by the inflation print today), value stocks can be in vogue. Of course, growth stocks might surge more in terms of percentage gains, but I’d say value ideas have less risk associated. This can make them appealing for investors.
Looking for ideas
When I consider some of the stocks doing well today, I can immediately spot some ideas. For example, consider homebuilders.
These firms have been hit hard over the past year, with high interest rates putting pressure on the property market in general. If lower inflation does mean that interest rates fall next year, this would be a good sign for the sector.
Shares such as Taylor Wimpey, Barratt Developments and Redrow are all up today. Yet when I look at the longer-term picture, I believe these firms are still undervalued.
Granted, it will take time to build up the forward order books, as well as having to be patient for house prices to recover. But in terms of an area where I think good value can be found, this is definitely one of them.
A pandemic recovery
Another area I’m keen on is travel and leisure. I recently wrote about International Consolidated Airlines Group (IAG). Airlines have continued to be under a cloud of pessimism since the pandemic, but the sun is finally starting to shine through.
For example, in the latest quarterly update, IAG said it “expects full year 2023 capacity to be around 96% of pre-Covid-19 levels”. The business is finally back posting profits, but I don’t believe the current share price reflects how well the firm could do in 2024.
A risk is the level of debt the business is still carrying from the pandemic. It will take a concentrated effort in coming years to reduce this further.
With lower inflation easing cost pressures, as well as giving customers more confidence to want to book tickets, I think this could be a great value play for next year.
I’ve got all these stocks on my watchlist to consider buying for 2024.
