For me, the FTSE is the best place to look for bargain stocks. It’s just not in vogue, and of course, there are concerns about the health of the UK economy and remaining Brexit issues. But I think these concerns are overdone.
There are other reasons for my UK focus at the moment too.
The pound is phenomenally weak against the dollar right now and I don’t see it getting any weaker. So, there’s a big issue in investing in dollar-denominated stocks. An appreciating pound could wipe out any profits I make on US stocks.
Let’s take a look at my top three bargain stocks I’d buy before the market recovers.
| Stock | Price-to-earnings |
|---|---|
| Barclays | 4.2 |
| Lloyds | 6 |
| Persimmon | 7.5 |
Barclays
Barclays (LSE:BARC) is a particularly unloved stock. It’s certainly not been popular with investors for a while — since the Brexit vote or even further back. The stock is down 25% over the past five years, and its down 10% over 12 months. It’s also the cheapest UK-based bank by P/E.
However, the bank disappointed as a huge impairment ate into profits. As a result, pre-tax profits fell 24% to £3.7bn. The fall in profits was partially due to a £1.9bn charge to cover the cost of buying back securities it sold in error.
However, I’m positive on Barclays’ outlook in general. Higher interest rates will boost margins, and 33% of its income comes in the form of dollars. So the weak pound will bump up income here.
The lender has an investment banking division, which despite recession fears, I think will perform better than expected in the coming months. Personally, I believe the market has reached the bottom and we’re not seeing recession hallmarks like higher unemployment.
Lloyds
Lloyds (LSE:LLOY) is also an unloved UK stock with a low P/E ratio of six. Like Barclays, it’s more UK-focused than market leader HSBC or Standard Chartered, both of which have much higher P/Es.
UK mortgages represented 61% of Lloyds’ total gross lending at 2021 year-end. And the UK represents around 66% of the bank’s income.
In the long run, I’m bullish on this weighting towards property. Demand has been in excess of supply for decades, although I appreciate we might see a short-term blip in the coming months. I certainly don’t expect there to be a house price crash.
I also like Lloyds’ move into the rental market, buying 50,000 homes over the next decade.
Persimmon
Housebuilder share prices have taken a hit recently amid rates rise and expensive charges for recladding thousands of buildings. However, right now, Persimmon (LSE:PSN), and other housebuilders are benefitting from record house prices and are making a fortune.
But I particularly like Persimmon because its recladding costs only represent 10% of pre-tax profits. Other developers will see all of their 2022 profits wiped out by the charge.
In the short run, we could see house prices come down, which won’t be good for homebuilders. But I still see now as a good time to buy. Industry concerns appear to have been priced in. Persimmon is down 35% over 12 months. And in the long run, as discussed above, I’m bullish on UK property demand.