Investors hunting for Black Friday discounts may find better value in the UK equity market than on the high street. Analysis from IG highlights a select group of London-listed companies delivering strong long-term returns while trading at unusually sharp valuation discounts.
That these markdowns persist even after a year in which the FTSE 100 hit record highs, and is on course to outperform the S&P 500 for the first time since 2016, makes them all the more noteworthy. A rising market should, in theory, compress the pool of bargains. In practice, a few remain.
The list includes Atalaya Mining LON:ATYM, business-software stalwart Sage Group and educational publisher Pearson LON:PSON. Each has outpaced the FTSE 350 over the past five years. Yet all now trade on price-to-earnings ratios materially below their own five-year averages.
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Markets normally reward consistent outperformance with richer multiples. Their retreat implies that investors either doubt the durability of recent earnings or have become overly cautious about future growth.
FTSE 350 bargain stocks
The P/E ratio, while hardly a sophisticated metric, is still the City’s favourite quick-and-dirty gauge of sentiment. A low reading may signal structural decline or cyclical indigestion. But it may also indicate that the market is mispricing resilience.
Chris Beauchamp, IG’s chief market analyst, argues that the latter is relevant here. “Despite the surge in UK stocks this year, there are still bargains to be found for those taking a long-term view,” he says. “Capital flight out of the US has boosted the domestic stock market considerably, but some companies have benefitted more than others. Household name Sainsbury’s LON:SBRY continues to trade at a hefty discount to its five-year average valuation, especially when considered against competitors such as M&S, as do software firm Sage and education group Pearson.”
Sainsbury’s is the most conspicuous bargain. The grocer’s shares have returned 113 per cent over five years, yet its current P/E ratio sits 73 per cent below its historical average, the deepest discount in the FTSE 350. Such a gap is difficult to square with performance alone.
Investors remain wary of the slowing UK grocery market, intensifying competition from Aldi and Lidl, and uncertainty about how much margin the group can retain as food inflation cools. Nevertheless, for value-minded investors, buying a proven if unglamorous compounder at a historically cheap multiple holds obvious appeal. As Beauchamp notes, “While there is no sure thing in markets, buying strong performers at a discount provides some measure of protection against market falls.”
Cheap stocks can cut both ways
Yet valuation anomalies cut both ways. If Sainsbury’s is the market’s biggest bargain, Marks and Spencer is its priciest indulgence. IG’s analysis puts M&S on a P/E ratio of about 375 — a 77 per cent premium to its five-year average. The retailer’s turnaround has impressed, but such a multiple demands flawless execution. Other household names also trade on lofty premiums: Dr Martens at 82 per cent above its five-year norm, miner Fresnillo at 42 per cent, and HSBC at 33 per cent.
Still, even discounted stocks require scrutiny. “Attractive price-to-earnings ratios can be a good indicator of a bargain,” Beauchamp cautions, “but it’s still advisable to consider companies’ historical performances and wider market contexts. Pearson, for example, still carries a legacy of uneven earnings and a disrupted education market, while Sage continues to grow more slowly than global software peers.”
For investors, then, the message remains an old one: bargains exist, but so do traps. The challenge lies in telling them apart.
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