With the UK housing market seemingly in danger of becoming a bubble (and subsequently bursting), the Chancellor George Osborne has decided to give the Bank of England powers to cap mortgages. This could help to avoid a scenario whereby the Bank of England raises interest rates too quickly so as to curb house price increases, which could leave the wider UK economy in difficulty.
As a result, it appears more likely that interest rates will stay lower for longer, since the Bank of England has an alternative tool with which to cool house price increases. As such, a lower interest rate could be hugely beneficial for the UK economy, since it should help to encourage consumer spending over saving. With that in mind, here are five stocks that could benefit from the Chancellor’s decision.
JD Sports
JD Sports (LSE: JD) has experienced a strong first half of 2014, with shares being up over 12% year-to date. Despite this, it currently trades on a price to earnings (P/E) ratio of 13.2, which compares very favourably to the FTSE 250 index (in which it sits), which has a P/E of 19.2. In addition, forecast growth rates in earnings per share (EPS) of 6% in the current year and 13% next year could be bolstered by higher consumer spending.
Sports Direct
Despite trading on a price to earnings (P/E) ratio of 20, Sports Direct (LSE: SPD) has very strong growth forecasts. Indeed, the dominant force in sports equipment in the UK is set to increase EPS by 26% in the current year and 15% in the following year – well above the mid-single digit market average. Combining its P/E and EPS growth rate yields a price to earnings growth (PEG) ratio of around 1, which is considered to be the PEG ‘sweet spot’.
Thomas Cook
After experiencing a steep decline in its share price over the last couple of months, Thomas Cook (LSE: TCG) now appears to be far more sensibly priced. Indeed, shares currently trade on a P/E of around 14 and, although they do not currently pay a dividend, they are forecast to yield over 2% next year as the company is set to return to profitability following three years of losses.
Dixons Retail
After beating a number of rivals in a war of attrition during the credit crunch, Dixons Retail (LSE: DXNS) seems to be well-placed to take advantage of further strength in consumer spending. As with Thomas Cook, it is set to bounce back from three loss-making years when it reports its results to April 2014 and, looking ahead, could narrow its current valuation gap versus the index, with Dixons Retail currently trading on a P/E of 16.2 and the FTSE 250 having a P/E of 19.2.
Debenhams
Although shares have delivered a rather subdued performance during 2014 (they are currently down over 2%), Debenhams (LSE: DEB) has considerable potential. As well as having the scope to benefit from further improvements in the UK economic outlook (aided by interest rates that could be lower for longer), Debenhams appears to offer very good value. For instance, it trades on a P/E of just 9.6, which is less than half the FTSE 250 P/E of 19.2. Furthermore, shares currently yield a whopping 4.7%, with dividends being well-covered by net profit.