With long-term potential and a low price-to-earnings ratio, Imperial Brands, Asos and Centrica are three undervalued UK stocks to look out for amid the market rotation from growth to value.
As interest rates go up to get rising inflation under control, many investors are choosing to rotate out of growth stocks and into value stocks, such as Asos [ASC.L], Centrica [CNA.L] and Imperial Brands [IMB.L].
If the war in Ukraine drags on then this may delay further interest rate rises, which could see an inflow of money back into growth stocks. But with stock markets in flux amid heightened economic and political crises, many investors are looking to companies with long-term growth potential and a low price relative to their earnings. The value of growth stocks declines as interest rates reduce the value of companies future cashflow projections.
Despite the rotation from growth to value being under way, a number of UK stocks are still heavily discounted. Imperial Brands, Centrica and Asos shares have all been trending downwards since the start of the year, but strong performance and analyst sentiment suggests these stocks are undervalued.
Is the Asos stock ripe for buying?
The Asos share price has been dragged down over the last few months, mainly in part due to slowing sales growth caused by ongoing supply chain issues caused by the omicron variant of Covid-19. The stock was down 31.9% since the start of the year at the close on 6 April.
Reports on 4 April suggested that the company was being targeted by short-sellers, along with Boohoo [BOO.L]. Hedge funds believe that the Asos share price has further to fall, especially given that the online retail darlings of the pandemic have been losing their shine.
While pre-tax profits for 2021 were only up 36%, compared with a rise of 275% in the first half of the fiscal year, there are reasons to be bullish on the company. For one, Asos recently launched a partnership with Nordstrom [JWN] to bring Topshop clothes to physical stores in the US. This is a clear indication that it is keen to drive up brick-and-mortar sales.
Analyst sentiment is generally positive, with nine ‘buy’ ratings and four ‘sell’ ratings, according to MarketBeat data. The consensus price target is 3,913p, an upside of 140% from the 6 April closing price.
Centrica shares make gains in March
Full-year results for 2021 released on 24 February showed that the owner of British Gas is getting its house in order and is now a leaner business as a result of its restructuring.
Although the earnings didn’t help ignite the Centrica share price, the conflict in Ukraine and the company’s decision to exit its agreements with Russia has helped the stock gain 19% since setting a year-to-date low of 67.66p on 7 March. The share price peaked at 84.78p on 25 March, its highest level since before the pandemic started.
Centrica could come up against headwinds in the near-to-intermediate term as consumers consider switching suppliers to save on their energy bills and offset the rising cost of living.
Hargreaves Lansdown analysts commented in a research note: “Centrica's transformation has been successful thus far, and we're impressed by how far they've come. But there's still a long way to go and the future's been muddied by looming uncertainty. That's tempered the market's expectations, with shares trading below their long-term average, and given us reason to remain cautious.”
Centrica had five ‘buy’ ratings and one ‘hold’, MarketBeat data shows. The consensus price target is 90.17p.
“Centrica's transformation has been successful thus far, and we're impressed by how far they've come. But there's still a long way to go and the future's been muddied by looming uncertainty” - Analysts at Hargreaves Lansdown
Imperial Brands shares are still undervalued
Despite a strong performance in the 12 months to the end of September, with revenue and profits edging up slightly year-over-year, Imperial Brands has low multiples and can be considered heavily discounted.
The Imperial Brands share price is up 3.3% since the start of the year to 1,669p at the close on 6 April. This is 16.4% above its 52-week low of 1,434.23p set on 7 March. The stock is yet to recover to its pre-pandemic level, though.
“With debt coming under control, profit growth is the main area of focus. Price increases over the last year have been able to prop up sales despite declining volumes,” Hargreaves Lansdown analysts wrote in a research note.
They point out that a main reason for Imperial Brands’ valuation is that many institutional investors struggle to reconcile tobacco stocks with their portfolios. This means “shares are rated lower than the outlook for the industry really warrants”.
The key to Imperial Brands’ investment case is its dividend yield, which was 8.9% in 2021.
“In the medium term, Imperial can probably continue to squeeze more money out of fewer smokers,” the analysts continued, stressing that next-generation products will be critical to its success. “As it stands, that doesn't fill us with a lot of confidence. A prospective dividend yield of 9% makes the uncertainty more palatable.”
The stock has three ‘buy’ ratings, one ‘hold’ and one ‘sell’, according to MarketBeat data.