The Footsie fell around 1% within the first 15 minutes of trading on Thursday morning. The fall follows one of the worst days of trading for US stocks in recent years. Wednesday’s rout represented the steepest fall in nearly two years for US indexes. It came as investors assessed the impact of higher prices on earnings and prospects economic growth as monetary policy tightens. The impact of inflation was demonstrated by Target‘s disappointing trading update. Earnings per share came in at $2.19 against a forecast $3.07, as the retailer struggled to pass on costs to customers.
But as the Footsie falls on Thursday, I’m not selling and I’m looking for more UK-listed value stocks for my portfolio. I see the UK index as a great place to look for such value stocks with low multiples and strong prospects.
Footsie value
The FTSE 100 has provided some level of security over the last year compared with other major indexes. One reason for this is that it contains many oil and mining companies which have done well recently.
Another reason is that the Footsie has also been an unpopular market for some time now, partially due to Brexit. So it was starting from a lower base. Amid the current market volatility and inflationary concern, I’m focusing on UK-listed stocks offering great value and strong long-term prospects.
Oil companies and miners (which as mentioned form a large part of the FTSE 100) plus banks that are also a big part of the Footsie, tend to trade with fairly low multiples. They haven’t been in vogue like tech stocks.
Despite some short-term pressures, I’m also keen on housebuilders, such as Vistry Group, which currently has a price-to-earnings ratio of 6.6.
Choosing inflation-resistant stocks
With inflation concerns pushing stocks down, I’m increasingly looking at companies that have the capacity to pass costs on to customers. Rentokil Initial, one of the world’s leaders in pest control, recently announced that it had been fully able to pass all of its cost pressures on to customers. The firm delivered underlying revenue growth of 12%. Rentokil’s customers can’t compromise on spotless, hygienic facilities.
There are also utility firms, like National Grid. Energy and water firms are allowed to raise their prices in line with inflation, which means their revenues are, to some extent, protected. On Thursday, National Grid posted a jump in full-year profit on Thursday and lifted its dividend. In the year to the end of March, pre-tax profit rose 107% to £3.4bn.
A long position
I invest for the long term, so the current volatility doesn’t bother me too much. However, with many UK-listed stocks trading at a discount, I see now as a good opportunity to buy more. For example, banking giant Lloyds is down 13% so far this year. I think this bank, which is highly geared towards mortgages, has great long-term prospects. Higher interest rates will also help margins and profitability, assuming the rate rises don’t impact demand for mortgages.
I have to accept, of course, that all of my chosen stocks come with risks specific to them and more general risks. But I think I could do well long term with these stocks.