Stocks in the UK posted modest gains last week with the FTSE 100 climbing back into positive territory. The gains in the blue-chip index were boosted by financial stocks in particular, as investors were heartened by new stimulus measures from European Central Bank on Friday.
Further market moves are likely to happen this week as Chancellor of the Exchequer George Osborne presents the UK Budget – as well as several interest rate announcements from central banks around the world. The Bank of Japan will report on Tuesday, the US Federal Reserve on Wednesday and the Bank of England on Thursday.
With more news coming, investors therefore might need to be aware of undervalued stocks that will potentially post rally.
Using data from Morningstar Select, we found there are currently 16 undervalued UK stocks across different sectors, of which we picked three that Morningstar analysts consider to have the potential for further growth.
InterContinental Hotels Group (IHG)
InterContinental Hotels Group owns, manages, franchises and leases hotels and resorts. The company operates 745,000 rooms across 10 brands addressing the midscale through luxury segments. Americas represents 64% of total rooms, while Greater China represents 12%, Europe 14%, and Asia, the Middle East, and Africa 10%. It is an undervalued stock with a four-star rating by Morningstar analysts.
InterContinental’s current 5% of global hotel industry room share is set to increase, as the company controls 15% of the rooms in the global hotel industry pipeline, Morningstar analyst Dan Wasiolek says.
He forecasts total annual room growth of 3.6% for 2016-25, driven by high-single-digit unit growth in China, other parts of Asia, Middle East and Africa, and low-single-digit growth in Americas and Europe, supported by recent acceleration in pipeline growth of high single digits in 2013 and 2014 and low double digits in 2015.
The growth is driven by the growing demand of the next-generation traveller though the company’s emerging lifestyle brands: Hotel Indigo, Even, Hualuxe, and Kimpton.
However independent hotels and home and vacation rentals present an increasing competitive threat to the company. The advancement of technology also increases the access and awareness of these alternatives to the next-generation travellers.
The company stock was up 4.6% on the day, as more merger and acquisition news emerged in the hotels sector.
Lloyds Banking Group (LLOY)
Lloyds Banking Group is a London-based financial services firm that operates primarily in the UK. Its main business activities are retail, commercial and corporate banking, general insurance, and life, pensions and investment provision. Lloyds more than doubled in size when it acquired rival HBOS and now controls 20% of the U.K. mortgage market and 25% of its savings market. It is an undervalued stock.
Morningstar analysts expected a 2016 forward dividend yield of at least 4%, supported by the UK’s strengthening economy.
The European Central Bank's actions March 10 should be reassuring to bank investors. The longer-term refinancing operations, known as LTRO II, will be positive for banks as the ECB will effectively pay banks to borrow money to lend into the real economy. This will also help to offset the pain of negative interest rates, Morningstar analyst Erin Davis says.
Also as noncore assets shrink and government ownership falls, Lloyds is re-emerging as the bank it one was, a strong, conservative, and impressively profitable retail-focused institution, Davis adds.
Hikma Pharmaceuticals (HIK)
Hikma Pharmaceuticals manufactures and sells generic pharmaceuticals. Approximately 30% of sales are located in the Middle East and North Africa, making Hikma one of the largest pharmaceutical companies in the region. After the Roxane acquisition closes, U.S. sales will account for two thirds of revenue. Remaining sales are based in Europe. The stock is rated as undervalued with a four-star rating by Morningstar analysts.
Since going public in 2005, Hikma has grown rapidly thanks to emerging-market access, developed-country market share gains, and acquisitions, Morningstar analyst Michael Waterhouse says.
Being one of the world’s largest generic injectable drug manufacturers by volume, Hikma's low-cost operations should create additional market share gains in developed markets, primarily against less nimble competitors in the United States and Europe, Waterhouse adds.
Although Hikma is a fairly geographically diversified operator with recent acquisitions expanding its global reach, political instability in the Middle East and North Africa could stress its operations.
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