Top UK Stock Market Discounts This Black Friday

We’ve uncovered some of the most discounted investment opportunities in the UK stock market for those bargain-hunting this Black Friday. From investment trusts trading below NAV to undervalued stocks and high-yield dividends, we highlight some potential picks for discount-seeking investors.

In the first article in this series we looked at US stocks that were being offered at a discount ahead of Black Friday. But in this second part I want to look at opportunities that are closer to home for UK investors.

Investment Trusts Discounts to NAV

For our first selection of discounted UK stock market bargains, we look to a City of London institution, the Investment Trust market.

Investment Trusts are closed-end investment vehicles, which means that unlike ETFs the number of shares in the fund is broadly fixed, and the price of the shares in the trust fluctuates based on their supply and demand rather than the prices of the assets within it.

This creates the opportunity for discounts (and occasionally premiums) to NAV or net asset value.

Sometimes the discounts can be quite significant. Some kind of haircut is to be expected because if an investment trust’s holdings were liquidated in a fire sale, you wouldn’t anticipate getting the current bid price for those stocks.

Buying into an investment trust can be a way to gain cut-price exposure to an asset class, style or sector.

Though there is no guarantee that the discount will narrow or be closed entirely, it could get wider.

However, the investment trust market isn’t the staid and fusty institution it’s sometimes painted, and there are often activist investors, traders and other investment trusts on the lookout for bargains.

So can you buy a high-performing investment trust at a discount from NAV?

The answer is yes you can.

For example, if we look through AJ Bell’s list of select investment trusts, we come across Polar Capital Technology, PCT.LN

The fund, which is managed by Ben Rogoff and Nick Evans is up by almost +41.50% over the last 12 months, and has rallied +31.64% ytd. Outperforming the Nasdaq 100 as it did so, see below.

Yet despite this PCT trades at a discount to NAV of -9.30%.

PCT was established in 1996 and has £4.20 billion of AUM which is mostly invested in a mix of large and mid-cap tech stocks, in the US and Asia.

Here is a selection of other UK Investment Trusts that like Polar Capital Technology have low ongoing charges, a positive year to date return, and which offer a discount to NAV.

Name	Ongoing fund charge (%)	YTD return (%)	Discount/premium (%)
NB Distressed Debt Inv Extended Life Income	0	36.84	-28.98
Marwyn Value Investors Ord Income	0	17.48	-54.48
NB Distressed Debt New Glb Income	0	10.80	-40.44
Scottish Mortgage Ord Income	0.35	17.88	-10.57
Monks Ord Income	0.44	21.13	-10.37
Bankers Ord Income	0.49	15.48	-11.80
Blackstone Loan Financing Limited Income	0.5	46.35	-14.77
Edinburgh Investment Ord Income	0.53	13.02	-10.69
Fidelity Special Values Ord Income	0.69	12.47	-9.26
Allianz Technology Trust Ord Income	0.71	33.44	-10.55
Manchester & London Ord Income	0.72	37.54	-19.31
JPMorgan Japanese Ord Income	0.74	13.56	-12.33
Polar Capital Technology Ord Income	0.8	30.83	-10.00
The Global Smaller Companies Trust Ord Income	0.8	12.83	-12.58
Fidelity Emerging Markets Ord Income	0.81	12.45	-13.84
JPMorgan Indian Ord Income	0.81	10.23	-18.70
Rights & Issues Investment Trust Ord Income	0.85	11.11	-10.56

These three criteria are important but they are not a guarantee of future returns in themselves. However, they do provide us with a good starting point for further investigations and research.

UK Stocks Trading at PE Discounts

There are plenty of UK stocks that trade on a PE or price-earnings ratio that’s at a significant discount to the index, in this case the FTSE 100.

Which currently stands on a PE of 19.60 times earnings.

One such example is package holiday operator Jet2 PLC ticker JET2.LN , which trades on trailing PE of 7.12 times and a forward multiple of 8.67 times earnings.

That’s well below both the FTSE 100s lofty multiple, and even under the more conservative 10.50 times earnings for the FTSE 250 Midcap index.

Jet2 has a market cap of £3.43 billion, so it’s far from a minnow, year to date the stock is up by +27.0% and it’s risen by +37.0% over 52 weeks.

As such it’s outperformed both Easyjet and RyanAir, however, it could perhaps do more.

After all, Easyjet published FY 2024 earnings today forecasting a +3.0% increase in capacity in 2025. That’s the airline speak for more passengers will be flying next year.

Easyjet CEO-designate Kenton Jarvis, also said in a statement:

“The airline will continue to grow, particularly on popular longer leisure routes like North Africa and the Canaries and we plan to take 25% more customers away on package holidays,”

That could be interpreted as fighting talk, and a sign that Easyjet wants to eat Into Jet2’s business.

Or you could take it as a sign that the recovery in foreign travel is continuing to gather pace, and that the cake will get bigger for everyone.

Easyjet trades on a PE ratio of 10.90 times, Ryanair on 14.78 times with IAG, the owner of Iberia and British Airways, down at 5.58 times earnings.

Jet2 doesn’t have the overheads of the airlines proper but it should be sensitive to a pick up in tourism and travel, particularly to warmer climes, on short to mid haul routes, over the spring and summer months.

Dividend Discounts

One ratio that the market uses to indicate that things are a miss is dividend yield, which is a measure of the income that a shareholder can expect to receive, for owning a particular stock.

When a dividend yield rises well above the broad market dividend yield, it’s often seen as a signal that the company is in distress, or carries a higher level of risk than the market as a whole.

The market’s expectation is that an outsize dividend yield means that the dividend won’t be sustainable and will therefore be cut, or bypassed completely, in the not too distant future.

Companies can and do sometimes pay dividends out of cash reserves, or sell off assets to raise cash to maintain dividends, but they can’t keep that up forever .

In reality it may be better for shareholders longer term, to take their medicine now and forgo dividends, while the company reinvigorates its business, if it can .

However, the market isn’t always right and because of that some high dividend yields are persistent.

Take Insurer Aviva AV.LN for example. Aviva has a market cap of £12.91 billion, a PE ratio of 10.41 times earnings, and a dividend yield of 7.10%. Almost twice that of the FTSE 100s 3.60% yield.

Aviva isn’t even the highest yielder among the FTSE insurance stocks, but it does have a solid dividend track record, having paid a dividend since at least the year 2000.

True, there have been some bumps along the way, and on four occasions the dividend has shrunk.

In December 2019 it shrunk by -48.33%. However, Aviva did not pass on its dividend.

And by way of recompense in December 2021, it paid a special dividend to shareholders of 101.69p.

Aviva’s 10-year dividend growth rate stands at +8.41% though it’s much lower over 1 and 5-years.

Insurers with a “high” Dividend Yield

Name	Change (%)	Market capitalisation	Yield (%)	YTD return (%)
Phoenix Group Holdings PLC	-0.78	5.10 bn	10.46	5.16
Chesnara PLC	0.2	378.14 mn	9.67	5.06
Hansard Global PLC	1.95	64.06 mn	9.47	17.47
Aviva PLC	-0.84	12.80 bn	7.1	18.7
Personal Group Holdings PLC	-1.52	60.43 mn	6.37	11.54

Broker KBW, which specialises in banks and financials, published a sector note on the European insurers today, and Aviva was among its top picks to outperform.

Overall the broker is looking for earnings and dividend growth of between +7.0 and +8.00% across the sector, and they highlight that PE discounts and higher yields in the sector could lead to rerating.

The stocks I have highlighted today are just some of the discounted names that are out there.

There is always a reason why stocks are being discounted against the wider market.

The skill lies in deciding when that discount has gone too far, and in anticipating the reversion back towards the mean, whether that’s full or partial.