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UK shares have been trading at discounts to their US counterparts for some time. And I think the opportunities these present are too cheap to ignore.
I’m concerned, though, that the chance to buy UK stocks at bargain prices might be slipping away. That’s why I’ve been buying them for my portfolio.
Contrarian investing
Outperforming the stock market over the long term is hard. But it becomes impossible for investors who don’t have some sort of view that’s different from the general consensus.
That doesn’t have to be a radically unorthodox thesis. It just has to involve thinking that some stock – or class of stocks – is being underestimated by the majority of investors.
In my case, that’s UK stocks. In a lot of cases, I think there are shares trading at prices that are well below the intrinsic value of the underlying businesses.
This is actually a view that quite a lot of investors agree with. But they object that discounted valuations have been around for a while and things aren’t showing any sign of changing.
Unlocking value
I think there are three things to say in response. One is that several UK companies have been the subject of takeover bids, which implies investors are starting to take notice.
Another is that more and more firms are using their excess profits for share buybacks. That increases the number of buyers in the market while also boosting future earnings growth.
Lastly, the UK government is starting to encourage people to begin investing, rather than keeping cash in savings. And this could also increase demand in the market.
Nothing’s going to change overnight, but I think there are some powerful forces behind UK shares. But if I’m right, the opportunities available at the moment may not be around forever.
A UK bargain?
One of the most interesting examples I’ve seen recently is Jet2 (LSE:JET2). The company has a market value of £2.75bn, but after subtracting £2bn in net cash it looks ridiculously cheap to me.
With numbers like that, the firm’s balance sheet is worth a closer look. While it does show £3.35bn in cash and £1.27bn in debt and leases, there’s something else for investors to look at.
Jet2 also has around £1.3bn in deferred revenues. In other words, this is cash it has collected upfront for flights and holidays it has to deliver on this year.
That adds to the firm’s cash on hand, but doesn’t show up as debt. But I think investors need to factor this in – and adding it back means the company’s enterprise value roughly triples.
Value hunting
I think the UK is a great place to look for undervalued stocks to buy – and that’s what I’ve been doing in my portfolio. And I don’t expect the current opportunities to be around forever.
Investors, though, do need to look closely at what they’re buying. It’s important that value stocks really are cheap and don’t just look that way at first sight.
Jet2 is a good business in a strong financial position that may be worth considering. But when it comes to UK shares, I think there might be even better value opportunities to think about at the moment.
