There are several strategies that you can use to find the 'best' investments in a financial market - based on aspects such as risk tolerance, time frame, and your goals.
That said, one of the popular methods preferred by seasoned investors is to identify undervalued stocks.
In simple terms, undervalued stocks are companies that are trading at a price deemed lower than their perceived intrinsic value. Think of such stocks as those currently available on sale.
The chances are, you will be able to profit when the market eventually realizes the stock’s true value.
In this guide, we discuss some of the best undervalued stocks UK in 2021. We also discuss how you can identify undervalued stocks yourself without needing to rely on a third-party advisor.
Five Steps to Invest in the Best Undervalued Stocks UK
How to Buy Undervalued Stocks with 0% Commission
If you are strapped for time, here we have a summary of how you start investing in the top undervalued stocks in 2021.
- Choose a regulated stockbroker that offers 0% commission - such as eToro
- Fund your online broker account
- Select the company stock you want to purchase and open a 'Buy' order
- Enter the number of shares you want to buy
- Confirm the position, and complete the purchase of your undervalued stocks
For those who are looking for detailed instructions, you can find this in the last section of this guide.
Contents:
The Basics of Best Undervalued Stocks UK
Tips to Identify Best Undervalued Stocks UK
Why Should You Buy Undervalued Stocks?
How to Use Ratios to Find Best Undervalued Stocks UK
How to Buy Best Undervalued Stocks UK on eToro
Best Undervalued Stocks UK - Conclusion
Best Undervalued Stocks UK to Invest in Right Now
Making a decision to employ a value investing strategy is the simple part. The challenge lies in determining which UK stocks fit the criteria and make for a viable investment.
Ideally, you are looking for stocks that represent a bargain - compared to their intrinsic value. To give you an idea, here we review the 10 best undervalued stocks UK as of 2021. However, before you make any investments - we strongly urge you to do your own research.
The 10 Best Undervalued Stocks in the UK:
- Aviva (AV)
- Airtel Africa (AAF)
- Tesla (TSLA)
- Morrisons (MRW)
- PayPoint (PAY)
- British American Tobacco (BATS)
- S4 Capital (SFOR)
- BP (BP)
- The GYM Group (GYM)
- Redrow (RDW)
If you want to dive into the stock market quickly and easily, with 0% fees, check out the eToro Exchange!
Top 10 Undervalued Stocks UK
Below you will find the top 10 undervalued stocks in the United Kingdom as of 2021.
1. Aviva (AV)
Aviva is a multinational financial services firm that primarily offers pension funds and life insurance. The stock price of this company has been on a roll recently. Over the course of the last year, the value of the shares has increased by nearly 50%.
The stock price of the company took a hit in 2020 - forcing it to cut its impending dividend payment. However, in the past year, Aviva has started disposing of its operations in several Asian and European countries to focus more on the UK, Irish, and Canadian markets. This allowed the firm to improve its balance sheet and restart its dividend policy.
For the first quarter of 2021, the firm is to pay out an attractive dividend yield of 6.8%. Aviva shares are currently trading at 401.30p, appearing to be undervalued at this price level.
2. Airtel Africa (AAF)
Airtel Africa is a multinational company that provides telecommunication and mobile services in 14 countries. Many investors firmly believe that economic growth in Africa is only getting started.
And Airtel Africa is one of the few London-listed companies that will allow you to tap into this market.
With a relatively low P/E ratio of 11, the shares of the firm are priced at 79p each at the time of writing. The value of the stock has also gone up by over 100% over the past year.
In addition, the company also offers a dividend yield of over 5%. Right now, the stock comes across as heavily undervalued.
3. Tesla (TSLA)
US-based Tesla is primarily the manufacturer of electric vehicles and is also involved in the development of renewable energy solutions.
The company was launched in 2003 and held its IPO later in 2010 - at $3.84 per share (adjusted price to take into account Tesla’s stock split). Fast forward to April 2021, the price of Tesla stock stands at $611.29. This translates to a growth of over 15,000% for early investors.
So, this brings us to the question - what makes Tesla undervalued?
If Tesla stock regains its 2020 highs of $872 - this would represent a gain of over 38% based on current prices. Not only that, investors are more interested in the possibilities of the company over the long term. After all, the firm is still in the initial phases of its EV journey.
With one of its core divisions being renewable energy, the company might have a much wider market base in the years to come.
4. Morrisons (MRW)
Morrisons is one of the UK's leading supermarkets. The company recently expanded its partnership deal with Amazon as a supplier - giving it a competitive advantage in the retail industry.
The share price of Morrisons had tumbled in the last few years. This digital shift could help change its traditional image - which could help its stock price appreciate further this year.
The stock is trading at 191.89p at the time of writing. The group also has an attractive P/E ratio of 12.6, along with a decent dividend yield of 5%.
5. PayPoint (PAY)
PayPoint plc is a British retail platform that offers a system for paying bills in the UK, Ireland, and Romania. The company has set up its EPoS equipment in over 27,000 locations across the United Kingdom.
Meanwhile, the stock price of the company is at 601p at the time of writing. The P/E ratio is in the modest single-digits, and the firm is also anticipated to give out a dividend yield of over 5%.
Overall, it appears as if the payment services provider is going through an undemanding valuation. If the share price is to hit the pre-pandemic levels of 1088p - you are looking at an increase of 81% based on current prices.
6. British American Tobacco (BATS)
British American Tobacco is one of the main constituents of the FTSE 100. With its share price listed at 2,783p, you might be surprised to see us add it to our list of the best undervalued stocks UK.
However, there are two aspects that make BAT an attractive buy. For one, although its share price might seem high, it is far shy of its all-time peak of 5,578p in May 2017.
The stock has been declining since then, bringing it to a value 60% less than its all-time high. With tobacco still considered a 'staple' product, consumer demand will always be good.
Furthermore, British American Tobacco is also one of the best dividend payers in the market now - with a yield of just under 8%. In addition, its recent short-term drop could be a result of supply-chain challenges as per the COVID-19 pandemic.
Therefore, you might be able to get your hands on these shares at a discounted price - if you make a move at current prices. If BAT regains its all-time high of 5,578p - you are looking at gains of over 100%.
7. S4 Capital (SFOR)
The advertising agency company S4 Capital has shown remarkable growth in 2020 - with a year-over-year increase of 232%. The firm is headed by the prominent British businessman Sir Martin Sorrell - who also built the world's largest advertising empire, WPP.
The company started 2021 with a shopping spree, acquiring two US-based businesses, Decoded Advertising and MightyHive. The firm is moving at a swift pace to implement its revamped digital advertising strategy in Europe and other parts of the world.
On March 25, 2021, S4 Capital released its unaudited preliminary earnings reports - revealing a 19.4% increase in like-for-like gross profit from the prior year. All in all, the actions of the company might be pointing towards a steady stock price rise price in the future.
As we write, the company is trading at 505.89p - which might make it an undervalued stock.
8. BP (BP)
BP shares have lost over 60% of their value over the past 12 months. As oil prices have declined substantially since the beginning of the pandemic - this has wiped out the company's main profitability.
However, since October 2020, BP stocks have been gradually rising.
What might be more interesting to value investors is the company's plan to venture into renewable energy projects. The firm is heavily reinvesting, and in the long run, these efforts might turn out to be fruitful.
Additionally, oil prices are also showing an upward trajectory - which is good news for BP investors.
At the time of writing, BP shares are trading at 301.85p - which translates to growth of nearly 35% from its 52-week lows of 222p. If this trend continues, BP could be identified as an undervalued stock based on current pricing levels.
9. The GYM Group (GYM)
As the name suggests, The GYM Group runs a chain of fitness clubs in the UK, and not so surprisingly - 2020 was a debacle for the industry and the company itself. With gyms closed for most of the year, revenues took a hit and the company reported losses.
However, considering the past performance of the GYM Group, revenues will certainly pick up when fitness centers reopen. The lowest share price of the company was 95p in March 2020. This has since increased to 259.50p as of March 2021. This translates to gains of 172%.
With that said, the all-time high stock price of GYM was 334p in August 2018. At this rate, the company might have no trouble reaching this peak or performing even better.
Overall, the future of The GYM Group should be positive in the long run and thus - its shares look undervalued.
10. Redrow (RDW)
Housebuilder Redrow is currently a constituent of FTSE 250 and is one of the cheapest shares in the sector. The company is trading at 628p at the time of writing - which denotes an increase of over 100% from prices in March 2020.
With government support for the housing market, the firm's share price has been steadily on the rise. This is indeed positive news for the likes of Redrow and other companies in the sector. In the forthcoming years, its dividend yield is predicted to increase.
After a halt, the company has resumed its dividend payout at 1.07% - which can be considered reasonably decent at this time.
That said, there are also a few potential risks in the housing market. If BOE interest rates are to rise, property prices might go down - further decreasing the stock value of Redrow.
If you look past these short-term risks, Redrow could be considered as an undervalued stock that can bring in more growth in the near future.
The Basics of Best Undervalued Stocks UK
In layman's terms, undervalued stocks are shares that the wider financial markets are underestimating. In many cases, the market tends to overreact to negative news - such as political or economic developments - marking the stock price down excessively.
When this happens, market players might overlook the viability of a company and its earnings potential. As such, in phases like this - you can find opportunities to profit from buying stocks at a discount.
In other words, when you invest in an undervalued stock - it means that you are buying the share at a lower cost price compared to its 'true' value.
Consider this example:
- Let us suppose that you purchase the stock of BP at 300p per share
- However, based on predicted future cash flow and revenues - you arrive at the conclusion that the shares are worth 450p.
- In this case, BP can be considered an undervalued stock.
That said, it is important to understand that the 'value' of the stock can be subjective to every investor. For instance, just because BP shares are worth 450p for you does not necessarily mean that it is the case.
It could be quite the opposite - meaning that the market was right in pricing BP shares at 300p per stock.
Consequently, identifying undervalued stocks in a market is a tricky process, mastered by only a few investors. You might already know that stock market legend Warren Buffet successfully follows this strategy.
On many occasions, he has confirmed that finding undervalued stocks is the secret of his success in financial markets.
If you are able to find such gems of opportunities in the market by buying the best undervalued stocks in the UK, you might be able to harvest high earnings when the shares go back to their intrinsic worth.
Read Also: What Are The Top Stocks To Buy Under $5?
Tips to Identify Best Undervalued Stocks UK
In order to determine the best undervalued buys in the market, value investors use a number of strategies. This includes analysis of a company's performance - such as revenue, cash flow, earnings, and P/E ratios, along with a bunch of other financial data.
Although we have listed a number of the best undervalued stocks UK here - it is always best that you do in-depth research from your side and arrive at your own investment decisions.
To point you in the right direction, we have listed a few metrics that you can take into consideration while searching for the best undervalued stocks UK.
Understand Why a Stock Might be Undervalued
It will be difficult to find undervalued stocks if you do not know what to look for. After all, each company might have a different set of factors that led to its lowered stock price.
In a broader sense, here are some of the potential reasons why a stock might be deemed undervalued.
General Market Crash
A market downturn is the most obvious reason for a stock to become undervalued. The wider view of the economy becomes poor, and as a result - almost every sector (with the exception of a few) will also go through a rough period.
The perfect example of this is the impact of the COVID-19 pandemic on the global financial markets. Almost every sector reacted with apprehension - and suffered from losses. And most importantly, this was to no fault of the individual companies, as the crash had an impact on virtually every industry.
In light of this, a market crash might present one of the best opportunities for you to buy undervalued stocks. For instance, the FTSE 100 - an index that tracks the 100 largest UK stocks, was trading at 5,190p in March 2020. However, a year later, at the time of writing - the index is now priced at 6,747p, representing gains of 30%.
Negative News Stories
The stock of a company can also react to a news story or a report that can have an adverse effect. For instance, if a firm announces that it is planning to execute job cuts - for shareholders, this might mean that there is a cause of concern about the firm’s long-term viability.
This could lead to a sudden over-reaction, with stockholders cashing out their investments. In turn, this will drive share prices down. However, such dips mostly tend to be short-lived and gives you a chance to grab the shares at a discount.
Quarterly Earnings Reports
Earnings reports will give you an insight into key metrics such as the firm’s operating margins and revenues. In most cases, shareholders have an expectation when it comes to the profitability of a stock.
If the earnings report fails to keep up with this anticipation - the market might react by selling the shares. Once again, this negative reaction can be a brief and potential opportunity for smart investors to purchase the stocks at an undervalued price.
Look for Undervalued Stocks in Sectors you Understand
There is nothing that can replace research when it comes to investment strategies - be it in the form of fundamental or technical analysis. However, it would also help if you are looking for shares in industries that you are familiar with.
For instance, if you have no clue about technology, how can you be sure what the company is worth or whether its business model has better prospects?
You need to understand why a certain company pays out a high dividend yield or why it is reinvesting retained profits. In plain terms - if you are unable to answer these questions - it means that you need to do more research.
The best way to approach this tactic is to opt for fields that you already have a foundation in.
Or alternatively, you can focus on one industry - such as banking, real estate, or technology, and focus on educating yourself about companies in this specific niche - rather than trying to be a Jack of all Trades.
Learn to Use Financial Ratios
Although fundamental analysis can give you foundational knowledge, there are a few technical tools that you can use to locate the best undervalued stocks UK.
Price-to-Earnings Ratio (P/E Ratio)
This is a ratio especially used to understand whether a company's stock is priced over or under its intrinsic value. In simple terms, a low P/E ratio almost always indicates that the shares are being traded at a below-market price.
Debt-to-Equity Ratio (D/E Ratio)
As you can guess, this ratio considers the size of a company's debts to that of its equity. If the D/E ratio is on the high end - it means that the stock has too much debt. For an investor, this could mean that the shares are overvalued.
Price-to-Earnings to Growth (PEG Ratio)
This one works together with the P/E ratio. In order to understand this metric, you divide the P/E ratio with the company's projected earnings growth. An undervalued stock often has a combination of high P/E and PEG ratios.
These are, in no way, exhaustive of the approaches you can use to find the best undervalued stocks UK. Therefore, we strongly urge you to do independent research yourself.
Consider the Bigger Picture
There might be reasons beyond those present on the balance sheets that cause the value of a stock to drop. Sometimes, you will also need to look at other markets and companies to understand why a specific organization has been performing well or badly.
For instance, take the case of Amazon. The stock price of this company has performed well above market expectations over the prior 12 months. This is primarily due to the fact that it is currently ruling the online retail sector and is in full control of its pricing model.
Put otherwise, in times of economic uncertainty - Amazon has the power to reduce its prices and attract more customers. In comparison, other online retailers might not be in a position to do this.
As this indicates, sometimes you might need to look past the obvious indicators to spot undervalued stocks.
Why Should You Buy Undervalued Stocks?
Say that you are in the market for a product, and you spot a deal that allows you to buy it at a 50% discount. Naturally, this offers great value.
You can apply the same logic to undervalued stocks as well. Investors are always on the hunt for the best opportunities that can bring you capital appreciation. As long as you stand to sell your shares for more at a later date - you will make a profit on the trade.
In the case of undervalued shares, you are paying a lower buy price than its true intrinsic value. If your perception of its intrinsic value is correct, then you can make money when the stocks reach their projected value. In many cases, the stocks can go even higher than you had initially projected.
For instance:
- Suppose that Tesla shares are priced at $600
- However, your research indicates that the stock of Tesla is worth much more, perhaps $800
- Hence, you choose to buy 100 shares of Tesla
- This brings your total investment to $60,000
- In one year, Tesla stocks hit a price of $800
- You decide to cash out your investment at a total of $80,000
In this example, you made a profit of $20,000 - translating to gains of 33%.
How to Use Ratios to Find Best Undervalued Stocks UK
As we discussed earlier, one of the best ways to identify undervalued stocks is to rely on a number of ratios. Although these alone are not sufficient, they can nudge you in the right direction.
Here are a couple of simplified examples of how you can use the ratios to find undervalued shares in the stock market.
Example 1: P/E Calculation
- Let's say that Tesco is selling at a price of 250p
- We will consider that the firm makes a profit of £20 million annually
- Imagine that the company has 2 million shares in circulation
- Therefore, the Earnings Per Share (EPS) will equal 10 (20/2)
- To get the P/E ratio, we divide the share price of Tesco by its share price (250/10) - which amounts to 25x.
So, we have a P/E ratio of 25x on Tesco shares. Now, we need a comparison of the P/E ratio against other companies in the market to understand where this stands.
As Tesco is listed on the LSE, it is best to look for the average P/E ratio for the respective exchange.
- In case the average P/E ratio of the LSE was 50x, Tesco shares with a P/E ratio of 25x could be considered undervalued.
- In case the average P/E ratio of the LSE was 10x, Tesco shares with a P/E ratio of 25x could be considered overvalued.
If you want to dig deeper, you can compare the P/E ratio of Tesco to that of other retailers or companies in the same industry.
Example 2: Price-to-Book Ratio
The P/B ratio looks at the book value of a company against that of its share price. This ratio is used to understand a firm's value in regard to its balance sheet.
A P/B ratio below one means that the shares are potentially undervalued.
Let’s look at a simplified example:
- Suppose Tesco shares are valued at 250p each
- It has a book value of 300p per share
- In this example, the P/B ratio is 0.8x (250/300)
As you can see, the P/B ratio of Tesco is less than 1 - meaning that it could be undervalued.
How to Buy Best Undervalued Stocks in the UK
By now, we have covered the basics of how you can find undervalued stocks. To complete this guide, we will now show you how you can get started with an online brokerage account to start investing in the best undervalued stocks in the UK.
Ideally, it is best to opt for an FCA-regulated online broker such as eToro - which also allows you to buy stocks on a commission-free basis. Plus, eToro waivers the 0.5% stamp duty tax that you pay on LSE-listed shares.
Step 1: Create your Online Investment Account
As with any online financial service, you will need to first open an account on eToro. You can complete this step by entering your personal information and contact details. You also need to upload a copy of your passport or driver’s license to verify your identity.
Step 2: Add Funds
Fund your account by making a deposit. You can do so via an instant bank transfer, debit/credit card, or an e-wallet.
Step 3: Buy Undervalued Stocks
If you have done sufficient research, you should already know which stocks you want to invest in. Simply search for the company on eToro website, and you will be redirected to the respective investment page.
Complete the trade by entering the amount of money you want to invest in the undervalued stock, and click 'Open Trade.'
That's it! You have just purchased undervalued stocks without having to pay any commission.
eToro have proven themselves trustworthy within the stock market over many years – we recommend you try them out.
Your capital is at risk. Other fees may apply
Best Undervalued Stocks UK - Conclusion
To sum up, undervalued stocks give you an opportunity to invest in companies at a lower cost. This is primarily because these shares are available at a discounted price compared to their estimated value.
The challenge, however, is finding the best undervalued stocks in the market. You can start your search by using some of the tips we have mentioned in this guide and by completing your own research.
When you know which best undervalued stocks in the UK you want to purchase - make sure you do so only through a regulated broker such as eToro.
Read More:
What Are The Best UK Shares To Buy For 2021?
10 UK Shares To Buy In 2021 Could Double Your Money
FAQs
What is the meaning of undervalued stocks?
Undervalued stocks are those traded at a lower price than their intrinsic value.
Which exchange is best to find undervalued stocks?
You can spot undervalued stocks on almost every stock exchange. In the UK, they will be primarily listed on the LSE and the AIM.
Which ratio should I use to locate undervalued stocks?
Investors use a combination of ratios to find undervalued stocks - including the P/E ratio, P/B ratio, and D/B ratio.
How can I invest in undervalued stocks?
You can purchase undervalued stocks at FCA broker eToro without paying any commission. The minimum investment is just $50 per stock - or about £35.
How can I find undervalued stocks?
You can use a combination of fundamental analysis and accounting ratios to find out which undervalued stocks are worth considering.