HSBC identified nine “unloved stocks” listed on the London Stock Exchange that it says could be poised to surge due to several factors. The investment bank said U.K. markets have started to outperform other global indexes for the first time this year — since the release of the U.K.’s June inflation data on July 18. Stock markets interpreted the better-than-expected inflation print to mean the Bank of England was nearing a peak in its rate-hiking cycle. As a result, rate-sensitive housebuilder stocks rallied hard to push up the FTSE 100 benchmark index . While the bank’s strategists retain their underweight view on the U.K. market overall, they highlighted that London-listed stocks are “unambiguously cheap” on a valuation basis. .FTSE .SPX,.STOXX mountain 2023-07-18 Specifically, the strategists pointed out that the price-to-earnings ratio of the FTSE 100 index is currently trading at around a 20% discount to its 10-year average. In addition, the investment bank said that a strong pound has been a headwind for the FTSE index, as 72% of the benchmark’s company revenues are generated outside the U.K. in dollars or euros. “HSBC FX strategists now think GBP is one of the most overvalued currencies in the G10 and that further upside will be hard to come by without ‘idiosyncratic economic outperformance,'” said the strategists led by Edward Stanford forecasting a sell-off in sterling. “This could enhance the attractions of the FTSE 100 index.” With that in mind, the bank highlighted its “contrarian” stock screen of nine “unloved stocks” that included companies with relatively pessimistic analyst ratings but positive earnings revisions and upside earnings surprises. The bank said the above stocks are FTSE 350 constituents with bottom-quartile consensus ratings indicating a sell or underweight rating. The stocks also have a minimum 3% increase in forward earnings estimates over the past 60 days and an earnings revision ratio that signaled at least two upgrades for every downgrade. The stocks that meet the above screen criteria include cruise operator Carnival , pub group JD Wetherspoon , water company Pennon Group , asset manager Abrdn , pizza chain Domino’s Pizza , retailers Next and M & S , consumer goods giant Unilever and investment platform Hargreaves Lansdown . HSBC also said that this basket of stocks had strongly outperformed the broader FTSE 350 over the past two months, returning 9% compared to a 0.6% decline for the benchmark. However, the bank cautioned that the nine stocks were not treated for other considerations that typically make a portfolio. “By definition these screens are not relevant to everyone and should be viewed as a basis for further investigation,” the HSBC strategists added in a note to clients on Aug. 15. — CNBC’s Michael Bloom contributed reporting.
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