The UK market has held up better than many of its international peers over 2022’s rollercoaster ride but overall sentiment towards domestic shares is still downbeat, although AJ Bell’s Russ Mould thinks attractive opportunities can be found as we move into the new year. 
“Perhaps the best argument in favour of UK stocks therefore is the pessimism which surrounds them, because unloved can mean undervalued and there may be more than a few nuggets of value to be had as 2023 approaches, with something there to appeal to a range of investor requirements and risk appetites,” the investment director said.
Below, Mould chooses one UK stock each for cautious, balanced and adventurous investors, as well as those with income portfolios.
Cautious: Imperial Brands
For investors with a cautious stance – and not overly concerned with building an ethical portfolio – Mould saidtobacco giant Imperial Brands is worth looking at. While the addictive nature of tobacco products is problematic, it does mean that demand tends to hold up even during difficult economic times.
“Smoking is not everyone’s idea of a good way to relax but the globe seems no nearer to kicking its nicotine habit than it does its reliance upon oil and gas. Whether we like it or not, this provides opportunity for those investors who are prepared to be pragmatic and trade in the markets, and world, they have, rather than the one that they want,” Mould said.
Total return of stock vs index over 10yrs
Source: FE Analytics
“To put none too fine a point on it, Imperial Brands still looks cheap as it offers a yield of 7% and comes on a price-to-earnings ratio of barely eight times.”
Although the regulatory tide is against the tobacco industry as governments around the world try to stop their citizens from smoking, Imperial Brands has recently issued a series of upbeat trading statements as it continues to grow market share and push through price increases.
Balanced: Lloyds
Mould said financial services group Lloyds could be a good fit for balanced investors, even though some might disagree with investing in a bank when interest rates are rising, there’s more risk of increasing bad loans and a recession appears to be looming.
However, he pointed to the fact that Lloyds’ shares trade at a discount to the last-reported tangible net asset value (NAV) per share, are on a mid-single digit earnings multiple and have a dividend yield of more than 5% for 2023. “It can be argued that the stock is pricing in a lot of the potential bad news already,” he added.
Total return of stock vs index over 10yrs
Source: FE Analytics
Today, Lloyds’ shares trade no higher than they did in late 2012 but over that time the bank has paid out £11.8bn in dividends and carried out £2.1bn of buybacks. This is more than 40% of the bank’s current market capitalisation and Mould said there should be further cash returns to come from dividends.
“Sentiment toward the stock remains resolutely downbeat, but net interest margins are expanding and loan losses in 2022 are undershooting expectations, so it may not take much to provide upside surprises,” he said.
“Meanwhile, Lloyds’ balance sheet is far stronger than it was back in 2007, if regulatory ratios are anything like a reliable guide, and that, coupled with the lowly valuation, will hopefully provide some downside protection if anything unexpected does go wrong in 2023.”
Adventurous: Zytronic
Investors able to tolerate more risk could look to small- and micro-cap stocks, which tend to be more volatile but offer the potential for greater reward. Mould highlighted Zytronic, which has a market cap of just £12m but has “huge potential” because of its exports.
“A leading maker of rugged, touch-sensitive screens, Zytronic has suffered a difficult couple of years, thanks to the crackdown on gaming terminals in betting shops, bank branch closures and falling numbers of ATMs, as well as also Covid. Supply chain issues have not helped either,” the AJ Bell investment director said.
Total return of stock vs index over 10yrs
Source: FE Analytics
“However, the Newcastle-based firm felt confident enough in 2022 to buy back stock and pay a dividend, as the order book and sales began to recover, particularly in the fields of vending and gaming, helped by new product developments in screens, buttons and touch sensors.”
Zytronic has experienced “big swings” in its sales and profits since it debuted on the stock market in 2000 but has come through them all, thanks to its strong balance sheet (it currently has £6.4m in cash, which covers almost half of its market cap).
Income: Lancashire
For income investors, Mould went for Lloyd’s of London syndicate manager Lancashire, which focuses on property, energy, marine and aviation insurance. However, he conceded this might seem like an odd choice, as the company offers a prospective dividend yield of just over 2% for 2022.
“After the Russian invasion of Ukraine, Hurricane Ian and other major events, prices in the catastrophe insurance and reinsurance market look to be firming nicely as some capacity is taken out and the strong take up the slack,” he continued. “Higher rates can mean higher profits and cash flow funds dividend payments, an area where Lancashire has an excellent track record.”
Total return of stock vs index over 10yrs
Source: FE Analytics
Lancashire has paid out total dividends of more than 820p a share since it listed in 2008, which Mould said “looks good” when put next to its current share price of 609p and suggests the company has the potential to become an attractive yield play when future dividends arrive.
But he did note that dividend growth is “far from certain” in 2023 if insurers have to bear the brunt of any unforeseen events that emerge over the course of the year. That said, Lancashire is a company that could benefit from higher interest rates next year, as it would boost the earnings of the bond portfolio its uses to match with potential payment liabilities.