Buy low, sell high is easier said than done. But with a little help from Morningstar equity analysts you can identify the stocks that are trading at more or less than their fair value estimates. If a stock has a one-star rating this means that its current share price is considerably more than analysts value the company at, if the stock has a five-star rating it means analysts think the market has yet to realise that company’s true value.
These three UK stocks are rated one or two star by Morningstar analyst, and could be ripe for profit picking if shareholders are looking to release gains from their portfolio.
Associated British Foods (ABF)
Associated British Foods is a diversified international food, ingredients, and retail group with 124,000 employees and operations in 48 countries across Europe, southern Africa, the Americas, Asia, and Australia. The group sells branded groceries, manufactures sugar, supplies farmers with crop input and animal feed, and runs the 300-store strong Primark clothing retail chain. It also supplies ingredients like bakers' yeast, enzymes, lipids, and cereal specialities. Some 42% of sales are in the UK, and Primark generates 62% of operating profit.
ABF is a consumer conglomerate whose largest profit contributor out of five divisions is Primark, a deep-discount clothing retailer. There are two other business units that might move the dial on earnings: grocery and sugar. The remaining two, agriculture and ingredients, make little difference to sales or profit aggregates, given their size and stable growth. Primark is arguably ABF's best asset: it has the highest operating margins and returns on capital, along with the best growth prospects.
Primark is positioned as a high-volume, low-price operator, applying a hard discount model to clothing retail. As such, Primark is even cheaper than rivals claiming to be discounters.
RELX (REL)
RELX, formerly known as Reed Elsevier, is a diversified publisher and information provider. A majority of its revenue is generated in North America and Europe. The firm's various segments include Scientific, Technical, and Medical; Risk Solutions; Legal; and Exhibitions. RELX Group, plc is owned equally by two parent companies, RELX PLC, traded in London and with a 52.9% economic interest in the parent, and RELX NV, traded in Amsterdam and with a 47.1% economic interest.
Morningstar stock analyts think RELX is a solid business. About 80% of its operating profit is generated in publishing and industry data categories that we think provide natural defenses against competition. Analysts approve of the strategy to shed no-growth or structurally disadvantaged businesses, and believe this has the potential to improve the company's long-term competitive positioning.
Sky (SKY)
Sky is the UK's only satellite television operator and its largest pay television provider, with 12 million retail subscribers. It is also the largest pay television provider in Italy, with 4.7 million customers, and is a large operator in Germany and Austria, with 4.4 million pay television subscribers. The firm's strategy is to dominate the pay television markets in its respective countries. In the UK, it also offers bundles of broadband and telephony services; each of these services boasts more than five million subscribers.
Sky has succeeded in aggregating some of the best content available and then marketing its services. More than a decade ago, the firm began to enter exclusive deals to carry major sporting events in the United Kingdom. In addition, it acquired rights to many first-run movies and US-produced television series, which are becoming increasingly popular in the UK.
While it resells the majority of its purchased content to other television carriers, it also produces its own shows to distinguish its product. The completion of a new production facility in 2011 has enhanced the company's content-creation capability. The new building contains several studios, including one that is large enough to hold an audience and produce live shows, such as game or talk shows with a live audience.
