Are the UK's One-Year Wonders a Buy?

Before the recent bout of market volatility, some unloved UK stocks were on a roll, posting some serious one-year gains as they enjoyed a boost from the return of value stocks. Inflation and monetary tightening have also played a part in this reversal as the market perceives such companies to be more resilient in the times of rising costs.

Energy companies and banks, which make up a large part of the UK index, are seen as the most obvious beneficiaries of this sea change. But other well-known and frequently-held UK stocks are among those which have seen swift revaluations. These recent gains contrast strongly with their longer-term performance, which has been underwhelming.

Marks & Spencer (MKS)

M&S has been a serial underperformer for long-term shareholders, exiting the FTSE 100 for the first time in 2019. If you’d bought the shares five years ago, you would be nursing a loss of around 35%, excluding regular dividends. If you’d bought them a year ago, you’d be up by around 50%. Grocery stocks are now back in favour, helped by repeated lockdowns, rising inflation and M&A interest in the sector after Morrisons was the focus of a bidding war.

But the company has no economic moat, according to Morningstar analyst Ioannis Pontikis, who assigns the shares a 2-star rating, and a fair value estimate of £1.77, below current levels. Pontikis notes the M&S turnaround but thinks supply chain disruptions and rising wage costs will weigh on profits in the next financial year.

Shares in the telecoms company and former monopoly have a tepid long-term track record, despite forays into sport and its ownership of EE, the UK’s first 5G network. But the last two years have seen an impressive rebound, with a 43% gain since January 2020.

According to Morningstar’s Michael Hodel: “the firm continues to pepper the market with optimism concerning its longer-term prospects”. He assigns shares a fair value of £2, above current levels. Confidence is building in BT’s fibre rollout, Hodel adds, and, promisingly, many of its contracts are linked to inflation.

Centrica (CNA)

Like BT, Centrica is another former monopoly stock widely held by UK retail investors. It has lost 70% of its value in the last five years, but mounted a strong recovery in the last year as gas prices hit new records (our recent stock of the week column explains the implications of the energy price cap).

Morningstar analyst Tancrede Fulop says the shares are very close to being fairly valued at 70p, despite the recent bounce. The company has no economic moat and, though soaring gas prices and Centrica’s dominant position in the UK residential energy market in principle place it favourably, the industry price cap means profits will remain under pressure for the foreseeable future.

Lloyds Banking Group (LLOY)

Lloyds shares have been in and out of favour among retail investors since the 2008 crash. Today, Brexit and the coronavirus pandemic are stumbling blocks on its recovery story, but with interest rates rising and dividends returning, the outlook has flipped once more.

The bank is rare among our recovery names in that it has an economic moat, albeit a narrow one, and analysts think the shares still have some room to run. Shares are just above 50p after the latest run-up but are assigned a fair value of 70p by our analyst Niklas Klammer.

Royal Dutch Shell (RDSB)

Shell shares crashed in 2020 as the oil price slumped, while long-term shareholders suffered in terms of capital gains while benefiting from a generous dividend policy (crimped in 2020 amid the dividend slump). But oil and gas producers are back in favour for now and Shell’s recovery has helped support the wider FTSE 100 index, of which it is a chunky part.

Soon to lose the “Royal Dutch” moniker after investors voted to move its listing to London, Shell is a lightning rod for the ESG debate among UK investors – and an activist investor still wants to split it into “green” and “legacy” divisions. Morningstar’s oil analyst thinks the shares are fairly valued, assigning them a three-star rating, but could have further to go even after the rebound. Shares currently trade at £18 but have a fair value of £19.40.

Some Lessons From the Rebound

Timing is Important

Investors blessed with amazing foresight who bought these stocks a year ago will be celebrating right now. But retail investors usually don’t have that kind of luck and more often take a “long-term buy-and-hold” approach. Do long-suffering investors bail out now with some pride intact or wait for further recoveries? Short-term rebounds often make investing decisions like this more complicated. 

The Law of Percentages Matters

Long-term investors are nursing losses on these stocks, and in the case of Centrica, a pretty chunky one. Double-digit rises still don’t take the share price back to where it was five years ago. For example, if a share price of 100p falls 50%, it has to rise 100% to get back to square one.

Remember These Three Words: “Compared to What?”

The S&P 500 is up around 92% over five years, so it’s clear better gains could have been had elsewhere. It’s worth assessing what you expect as an investor – all of these companies were at one stage dividend stocks, so perhaps as an income investor you are willing to forgo capital gains. But are you willing to lose 30-40% of your investment to receive that income? Perhaps your investment horizon is 10 years + so you don’t need to sell, and can use price weakness to pick up more shares.

Don’t Assume The UK is Making a Comeback

The notion of a UK share recovery has been much-discussed, particularly after the government “completed” Brexit in 2021, and indeed after Boris Johnson won a majority in 2019. Share prices are now looking more lively, but investors are still cautious about allocating capital to UK funds, as our flows data shows.


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