No one knows what’s coming in the UK stock market, but it seems to me there are some real pockets of value. Other corners of the stock market look a bit frothy to me already, but continue to outperform for now. On my UK shares watchlist, I’m keeping an eye on the shares I think are disconnected from their fundamental valuation. Here are five UK shares I’m watching.
Bargains or value traps?
One of my core holdings is British American Tobacco. With its solid business base around the globe and a high single-digit yield, I find this tobacco behemoth attractive. While I appreciate the dividends rolling in regularly, as another one did last week, there has been some capital loss on BAT shares in recent years. Now standing at half of what they were less than four years ago, the shares look unloved. Full-year results next week will provide an update on how the business is faring. With a single digit price-to-earnings ratio and a tasty yield close to 8%, the shares look like good value to me and I am considering buying more. But clearly the wider market doesn’t currently value them the way I do. So for now I’m keeping BAT on my UK shares watchlist to follow what happens.
Similarly, I am tempted by asset manager M&G’s yield of 6%. But its dividend history as a standalone company is short, so I don’t yet feel confident that it will sustain its dividend at the previous levels. If the financial services market performs well it should be able to, but it’s a challenging environment right now. So M&G is, for now, one of my UK shares to watch. Also on my UK shares watchlist is Galliford Try. With its strong cash position, disciplined bidding strategy, and increasing focus on infrastructure projects, I fancy the builder’s chances of prospering even if there’s a housing downturn. But – like M&G – it hasn’t had a standalone listing in its current form for long. So for now I just have it down as one of my UK shares to watch.
UK shares to watch for growth
One difference between the US and UK stock markets is the relatively small number of large tech plays on the UK board. That is one reason the indexes have diverged in recent years, because London hasn’t had large companies with stratospheric growth such as Amazon and Apple.
One company which has online retail expertise a bit like Amazon is The Hut Group. With a market cap approaching £7bn, it looks pricy to me on the basis I’d value a retailer. Then again, that was true of Amazon for much of its history. If The Hut Group goes on to expand its online success exponentially, today’s share price could look like a bargain. For now, it’s on my UK shares watchlist.
S4 Capital is one of my UK shares to watch. I already own it, but I think the digital ad agency headed by Sir Martin Sorrell of erstwhile WPP fame has a great future. Recently some directors sold shares for the first time. But last week, director Miles Young topped up his holding close to the current price. That’s why I am watching closely, to find out whether the growth story matches my previous expectations.