To quote Niels Jensen from the April Absolute Return Letter:
"UK equities are quite attractively priced which should offer some considerable downside protection even if the economy continues to weaken. However, the lack of economic growth is likely to limit the upside potential. Our view thus remains unchanged. In the short to medium term, UK equities are likely to be range bound. In the long run, there is considerable upside potential."
While the US markets entered 2012 (and remain today) approximately 30% overvalued based on more normalized methods of valuation (CAPE, Q Ratio, etc.), the UK markets were about fairly valued, maybe even slightly undervalued. So the UK seems like it may be a pond worth fishing in. But where should we start looking for fish?
Warren Buffett and Berkshire Hathaway's (NYSE:BRK.A) stock holdings might be a good place to start. In an appearance on CNBC back in November, Mr. Buffett mentioned that there were some attractive stocks outside of the United States and mentioned Tesco PLC (OTCPK:TSCDF) as an example of something he had recently purchased shares of. Tesco's share price has come down since then, so it is possible to currently buy shares for a lower price than where Mr. Buffett thought there were cheap enough to add to his position.
Tesco currently trades for about 10x trailing net EPS and has a dividend yield of about 4.4%. It has also achieved returns on equity in the mid-to-upper teens over the past decade. So to try and find some potential candidates for further investigation in the UK, let's use Tesco's numbers as a general guide for a screen. Specifically, let's screen for:
1) Stocks based in the UK.
2) 5-year average return on equity over 15%.
3) P/Diluted EPS less than 10x.
4) Dividend Yield greater than 4%.
5) Total Debt less than 2/3 of Market Cap.
Besides Tesco, here are a few other companies that pass this screening test that might be worth further research:
- AstraZeneca PLC (AZN): 6.3% dividend yield
- Debenhams plc (OTCPK:DBHSY): 5.1% dividend yield
- HomeServe plc (OTC:HMSVF): 4.5% dividend yield
- N Brown Group plc [LSE:BWNG]: 5.4% dividend yield
- Halfords Group plc (OTCPK:HLFDY): 7.0% dividend yield
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: This article is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation for any security, nor does it constitute an offer to provide investment advisory or other services by Chanticleer Investment Partners ("CIP") or any other entities related to or owned by CIP's parent company, Chanticleer Holdings, Inc.