Cheap UK stocks to kick-start an ISA!

UK stocks have generally represented good value for some time, in my opinion. There are some pretty simple reasons for this, in my opinion.

For example, S&P 500 the stock is roughly trading at a 50% premium to FTSE 100 company. Of course, there are more ‘expensive’ growth stocks in there S&P 500, and the US is generally regarded as a more promising economy. However, for some time, I have been saying UK stocks are undervalued.

So following the recent stock market correction, I believe now is the best time to snap up some cheap blue-chip stocks as the ISA deadline / new ISA year approaches.

Cheap or undervalued

Investors often say that they are looking for cheap stocks, but what they really mean is that they are undervalued. After all, some stocks are cheap for a reason.

Finding an undervalued stock requires some research. Don’t just look for stocks that are trading less today than they were a year ago.

I can start by looking at simple short-term metrics such as the price-to-earnings ratio, or the EV-to-EBITDA ratio. These numbers need to be compared to peers in the industry to be meaningful. But this should give me some idea about whether the stock is undervalued versus its peers.

However, to be more precise, I should use the discounted cash flow (DCF) model. It can be difficult, but we can find online calculators to help us.

why now?

UK stocks have not been very popular for some time. There’s Brexit, worries about the UK economy, labor shortages, and war in Europe. This factor has been bad for investor sentiment.

But last month, we saw a correction, largely caused by the fall of Silicon Valley Bank in the US. This usually affects financial stocks. But now the fear has passed, and most analysts suggest the panic was unfounded.

So with stock prices falling with no explanation other than sentiment, now could be a good time to buy. I definitely have.

Top choice

Most of the damage occurred in the financial sector, but there were also casualties in other parts of the market. However, my focus has always been on the hardest-to-reach markets.

I recently added it Standard Chartered to my portfolio. It is one of the most valuable British banks because of its weight towards the faster-growing markets of Asia and the Middle East. However, it trades at just 7.2 times earnings, well below the FTSE 100 price average of 12-13 times.

At the moment, Standard Chartered intends to go ahead with its planned share buyback at a discount of 170p per share to when the buyback was announced. The correction has been massive, and is down 22% in a month (up 18% in a year).

Of course, there are concerns about the impact of very high interest rates on bad debt. However, hopefully, rates will cool down in H2.

Lloyds This is another stock I’m most up on. DCF calculations suggest it can be undervalued by 50-70%. It falls less than other stocks, but that is possible because it has less to fall. This is an unloved bank… but one with a very strong business.

I appreciate the short-term impact of interest rate hikes may no longer be positive. Higher rates are good for banks until they are not. But I buy now to lower interest rates in H2 through to 2026. There is a sweet spot for banks – when the central bank rate is between 2-3%.

These two stocks can be well-placed to deliver growth, and dividends, as part of a balanced ISA portfolio.