Interactive Investor

Are Lloyds Bank and Tesco on list of best value stocks to buy?

20th October 2020 14:58

Graeme Evans from interactive investor

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After their worst year in decades, it’s time to buy so-called value stocks, argues this City expert. 

Blue-chip stocks including Barclays (LSE:BARC), Vodafone (LSE:VOD) and BAT (LSE:BATS) were today named on a City banks 22-strong list of Europes best value opportunities.

Imperial Brands (LSE:IMB), SSE (LSE:SSE) and Legal & General (LSE:LGEN) also feature on the list, but Bank of America recommends investors avoid “value traps” Lloyds Banking Group (LSE:LLOY), BP (LSE:BP.) and Tesco (LSE:TSCO).

The 22 picks are based on the banks expectations for a potential 10% upside for value versus growth stocks by the first quarter of next year. It argues that the cyclical reasons for owning value have strengthened after the worst year for the investing style since 1992.

Its quant strategists screen of 250 of the largest stocks by market cap in the MSCI Europe index uses seven different valuation measures to identify the opportunity stocks with attractive yields as well as compelling fundamental drivers.

The value opportunities are dominated by stocks from the financial, consumer staples, industrials and communication services sectors. They include Vodafone, whose shares have continued to languish at 110p and just 12% above their March lows despite telco business models being regarded as substantially resilient to Covid-19 trends.

We reported this month that analysts at Deutsche Bank think Voda shares should be trading at 230p, particularly in light of the companys ability to continue paying a healthy dividend.

The encouraging trends reported in a recent update by Imperial Brands have also failed to inspire the companys share price from the 1,300p level. Broker Jefferies said last week that it saw a strong case for a sizeable re-rating based on a price target of 2,139p.

Bank of Americas tilt towards value reflects factors including the ratio of earnings per share revisions being the strongest since 2018. In addition, 90% of fund managers expect a Covid-19 vaccine in place by the first half of next year, which should help lift bond yields.

The US 10-year bond yield has been a key determinant of value versus growth in the past 20 years, but hasnt so far risen meaningfully in response to improving macro data. Two big European value sectors, banks and energy, have also continued to lag.

The note said: “We expect both obstacles to fade over the coming months, as we think a maturing economic recovery is set to translate into rising US bond yields and banks and energy are likely to outperform on the back of an improving earnings cycle. As a consequence, we expect value to outperform growth stocks by around 10% by early next year.”

The potential momentum for banks doesnt extend to Lloyds Banking Group after it was named as one of the six value traps - stocks the bank thinks will continue to underperform.

Widely held Lloyds is now worth less than £20 billion after shares fell to 27p on a combination of rising unemployment figures, Brexit uncertainty and the prospect of negative interest rates.

Tesco is another stock to avoid, according to Bank of America, as the supermarkets valuation continues to disappoint despite the extensive transformation under former CEO Dave Lewis. Others shares on the list of value traps include Primark owner Associated British Foods (LSE:ABF).

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

Related Categories

    UK shares
    Value Investor
    Europe
    Consumer goods and services
    Financials
    Growth Investor
    Commodities
    Telecoms
    Utilities

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