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This morning (December 20) we received the latest UK inflation reading. From 4.6% in October, November prices rose 3.9% year-on-year. This marks a sharp drop, leading to some positive sentiment in value stocks. He FTSE 100 It is up 0.8% so far today according to the news. If this rally continues, these are the stocks I think could outperform.
Why value makes sense
The reason I'm focusing on value stocks is because they can be very sentiment-driven. Fundamentally, a value stock is one that is trading below fair value over the long term.
Sometimes this can be because investors generally do not feel positive about the overall market. This can cause them to buy defensive stocks instead of turning to companies they don't like.
On the other hand, when things look more optimistic (helped by today's inflation), value stocks may be in vogue. Of course, growth stocks could rise more in terms of percentage gains, but I would say that value ideas have less risk associated with them. This can make them attractive to investors.
looking for ideas
When I consider that some of the stocks are performing well today, I can immediately spot some insights. For example, consider home builders.
These companies have been hit hard over the past year, with high interest rates putting pressure on the broader property market. If lower inflation means interest rates will fall next year, this would be a good sign for the sector.
Actions like Taylor Wimpey, Barratt Developments and Redrow They're all awake today. However, when I look at the long-term picture, I think these companies are still undervalued.
Of course, it will take time to build up forward order books, as well as having to be patient for house prices to recover. But in terms of an area where I think you can find good value for money, this is definitely one of them.
A pandemic recovery
Another area that I am passionate about is travel and leisure. I recently wrote about International Consolidated Airlines Group (IAG). Airlines have remained under a cloud of doom and gloom since the pandemic, but the sun is finally starting to shine.
For example, in the latest quarterly update, IAG said that “Full-year 2023 capacity is expected to be around 96% of pre-Covid-19 levels.” The company has finally returned to profit, but I don't think the current share price reflects how well the company could do in 2024.
One risk is the level of debt the company still has due to the pandemic. A concentrated effort will be needed in the coming years to reduce it further.
With lower inflation easing cost pressures, as well as giving customers more confidence in wanting to book tickets, I think this could be a great value play for next year.
I have all of these stocks on my watch list to consider buying for 2024.
