Value investing is about finding stocks to buy that are selling for less than they’re worth. I can see two UK stocks that fit the bill at the start of 2024.
Both have been having a tough time lately. One is a FTSE 100 bank that has failed to benefit from rising interest rates and the other is a FTSE 250 fashion footwear company that has gone nowhere but down.
Barclays
Rising interest rates through the first part of 2023 have been good for UK banks. In general, they’ve allowed better returns on loans, which has resulted in higher margins.
To some extent, that’s been offset by higher charges for loan losses, but profitability has generally been higher across the UK banking sector. Barclays (LSE:BARC) has been the exception though.
The stock has fared significantly worse than its rival Lloyds Banking Group in 2023. One of the big reasons is Barclays has a significant investment banking division.
After some ideal conditions with interest rates near zero, investment banking activity has fallen sharply as rates have increased. And that has created a drag on the company’s profits.
There’s a risk that the Barclays business model of combining investment and retail banking creates a model that underperforms in any environment. But I think things will work out well over time.
The market is expecting a cut in rates and I think the bank stands to benefit. At a price-to-book (P/B) ratio of 0.33, the stock is firmly in value territory and on my list to consider buying.
Dr Martens
Not much has gone right for Dr Martens (LSE:DOCS) since it first came onto the public markets in 2021. But I think the current share price reflects some very low expectations for the business.
Over the last 18 months or so, the share price has fallen by around 80%. But with the company not obviously facing bankruptcy or in a fight for survival, this looks like a mispricing to me.
The falling share price hasn’t been entirely unjustified – the business has issued five profit warnings since in six quarters. But I do think it’s an overreaction.
Dr Martens has faced two major problems recently. The first is weak demand in the US, coming from a difficult macroeconomic environment, and the second is issues with its e-commerce launch.
To some extent, both of these are the company’s fault. But both look temporary to me, which is why the stock is on my buying list for 2024.
Optimism about the US economy elsewhere in the stock market isn’t currently being reflected in the Dr Martens share price. The risk, of course, is that this positivity could be misplaced.
On my future buy list
Barclays and Dr Martens look to me like good companies that are going through short-term downturns. As a result, both stocks are on my buying list for the start of this year.
More than that though, I think both are good businesses. So it’s not that I’m looking to buy the stocks today to sell them when the price recovers – these are on my list to hold forever.
