While sentiment towards UK shares has improved marginally since the stock market crash, I’m surprised there hasn’t been more buying. Some of the market’s top blue-chip stocks continue to trade at levels not seen for decades. These valuations might make sense if these companies were facing bankruptcy. But, in many situations, that’s not the case.
As such, I’m convinced that buying UK shares today is a sensible decision. When the new bull market arrives, I reckon these deeply undervalued businesses could produce substantial returns.
With that in mind, here are two of my favourite blue-chip investments.
Stock market crash bargain
Emerging markets-focused bank Standard Chartered (LSE: STAN) lowered its growth targets earlier this year due to coronavirus. However, the Asia-focused lender looks set to benefit from the region’s rapid recovery from a crisis.
Indeed, initial figures seem positive. The lender reported credit impairment charges of $611m in the second quarter of 2020, down significantly from the $956m recorded in the first quarter. These figures are also significantly below the bank’s Western-focused peers.
Thanks to these better-than-anticipated figures, Standard’s second-quarter pre-tax profit came in at $733m, $182m better than analysts had expected.
Nevertheless, despite the lender’s improving operational performance, after the stock market crash, the shares are still off around 50% for the year. I think this suggests the stock offers and margin of safety at current levels. Therefore, one may benefit from buying Standard as part of a diversified basket of UK shares ahead of the new bull market.
A leader of UK shares
Distribution business DCC (LSE: DCC) has become one of the most successful blue-chip stocks on the market over the past decade. The company has followed a buy-and-build strategy. By reinvesting profits from operations back into acquisitions and organic growth, the firm has been able to increase sales by around 50% over the past six years.
Thanks to economies of scale, the company’s bottom line has grown even faster. Net income has roughly doubled since 2015.
I reckon the company can keep this up. Distribution is a very low-margin business. Therefore, the bigger better. Even though it’s one of the largest businesses in the UK, DCC’s profit margin is just 2.5%. This doesn’t leave much room for error. Even a small mistake could wipe out the group’a profit altogether.
That’s why smaller competitors have been so happy to sell to DCC. And it’s nowhere near close to running out of potential acquisitions. Last month, the group completed two acquisitions for a total of £60m, which helped boost its presence in the US market.
Despite the company’s potential, investors have been selling after the stock market crash. I think this is a mistake. Over the long term, DCC could have the potential to increase profits substantially, thanks to improved economies of scale and continued reinvestment.
When the economic recovery starts to gain traction, I think DCC could be one of the best UK shares to buy to profit from the next bull market.