UK shares: is this my once-in-a-lifetime chance for mega returns?

UK shares have massively underperformed in comparison S&P 500 over the past decade, but I think 2023 could be a better year for UK stocks.

My portfolio is focused on the UK. And in the last few weeks, this has been positive as UK stocks have been making gains.

But I still believe there is a bargain to be found in it FTSE. After all, the majority of UK stocks are selling at a discount while the index has been dragged up by surging resource companies.

The problem is, these corrections don’t happen often. It may not happen like that again. So I took the opportunity to invest in UK stocks which are undervalued now, before the market really recovers.

market correction

At FTSE 100 pushing above 7,500, but the FTSE 250, which is lighter on resource stocks, is down 15% over 12 months. And this further reflects the overall health of UK stocks.

Certain sectors suffer more than others. The housing sector has seen the biggest losses, with some stocks down more than 50%. That’s huge, but it reflects concerns about the state of the housing market with interest rates at levels not seen in decades.

But other sectors are also suffering, including retail, wealth management and financial services.

These corrections indicate a deterioration in economic conditions. And some stocks are obviously cheap for a reason. However, in the middle of a bear market, I have a good chance of finding undervalued stocks.

As most UK stocks trade at a discount and dividend yields are pushed up by falling share prices, I am constantly on the lookout for cheap stocks with upside potential.

Choose undervalued stocks

There is no consensus on the best way to evaluate a company. One thing is for sure, I have to do my own calculations, looking at metrics and models like discounted cash flow, price-to-earnings, and EV-to-EBITDA.

So I have to calculate what I think the stock is worth, and then see if there is a discount.

But I also need to understand the situation close to the company. Housebuilders are trading must be below where they were a year ago. But with interest rates rising, home prices likely to fall, and building cost inflation, it may not be the right time to invest.

Broker AJ Bell said the best performing UK stocks in 2023 are oil & gas, financials, mining, consumer staples and industrials. The former, it is anticipated, will see pre-tax profit growth of 24%.

Despite the forecast, I stay away from oil & gas. Companies in the sector have been running an 18-month bull run, and the situation can change quickly.

However, I am looking at the bank for example Lloyds which continues to benefit from additional net interest income. With inflation due to slow down, I also look closer at companies in retail such as WHSmith and Tesco. Lower inflation should allow margins to normalize.

I hope that by choosing my stocks carefully, I can achieve annual growth above my usual 10% target. With a focus on value stocks, I expect about 15% growth in 2023, including dividends. This will really advance my portfolio, and by buying cheap, I’m also locking in a bigger dividend yield for the future.