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Many UK stocks are now trading at what look like bargain prices after FTSE 100 down 10% from its recent high. That puts it firmly in the ‘repair’ zone (rather than a full crash).
A crash usually means a drop of 20% or more, so what we’re seeing is uncomfortable, but not unprecedented.
The obvious question is whether this is a temporary blip or the start of something much worse.
What causes sales?
Geopolitical risks in the Middle East triggered a sharp global sell-off as investors fled to safe-haven assets such as cash, gold and government bonds. Oil prices have fallen after the disruption in the Strait of Hormuz, raising fears of fuel and transport costs driving up inflation.
Those higher energy prices come just as the Bank of England was hoping to start cutting interest rates. So now markets are worried that these much-needed lower rates may be delayed. In addition, the latest round of US tariffs on autos and other imports has added another layer of uncertainty to global trade.
All things considered, the minor adjustment is not surprising. But repairs like this are rare and recovery is often stronger. Footsie is up 13.5% in the year following the latest 2022 fix.
For long-term investors who can’t stomach a flutter, they can provide opportunities to acquire quality UK shares at more attractive prices than usual.
One stock on my watch list
One stock I’ve been watching 3i Group (LSE: III), an investment firm specializing in private equity and infrastructure. Its largest holding – Europe-based discount retailer Action – has been a key driver of 3i’s strong profits in recent years.
In its latest annual results, net asset value (NAV) per share reached 2,542p and return on equity (ROE) was 25%. At the time, the price was up more than 1,800% since it started to restructure in 2012.
But recent results failed to impress, leading to a 20% decline. That’s why I think the low price would be a value opportunity worth considering.
A non-essential income game
Using a discounted cash flow (DCF) model, analysts estimate the stock trades at 68% below fair value. This ratio is supported by a forward price-to-earnings (P/E) ratio of just 4.25.
On top of that, the dividend yield has risen to around 3%, adding to the investment appeal of this growth-oriented stock. However, it has a 35-year payout history and last year, dividends rose 19.7%.
However, it is important to note that 3i has a high level of non-cash income. So while the dividend appears to be well covered by earnings, cash flow only accounts for 50% of payouts.
Additionally, as the Middle East conflict continues, higher prices may hit consumer spending. That means companies like Action could see slower growth and lower valuations. If cash generation delays profits for too long, the dividend may be cut.
Final thoughts
3i Group has long been a favorite of mine and still looks as attractive as ever. It owns a portfolio of real businesses, has a solid performance record, and now trades at what looks like a premium.
Just remember that buying during a correction doesn’t mean prices can’t drop significantly in the short term. That’s why diversity is important. Holding a mix of stocks from different sectors and regions reduces geographic risk, and returns continue to compound even as growth accelerates.
