Schroders’ Five Best UK Stocks To Buy

Investors have been shunning the UK stock market, with high inflation, slow growth, and a post-Brexit landscape making the country’s stocks that bit less attractive. Just look: the FTSE 100 is down 4% since the start of this year, compared to the S&P 500’s 14% gain. For bargain hunters, that’s a chance to nab decent stocks for an even better price. So let’s check out a list from Schroders, a well-known British asset manager with close to a trillion dollars under management, and check out the five UK companies keeping it optimistic.

Whitbread Plc (travel and leisure)

Hospitality-group-owner Whitbread Plc manages a chain of British hotels, restaurants, and coffee shops, and is building a presence in Germany too. The hotel industry’s very fragmented in the UK, especially outside of major cities, with independent brands, bed and breakfasts, and lodges holding most of the market. But still, Whitbread’s the UK’s number one hotel operator – and its core brand Premier Inn boasts a strong presence in the more rural market where there are better profit margins.

What’s more, Schroders believes this market is only getting more attractive in our high-interest-rate environment. Competitors are downsizing due to a lack of funding, while few new hotels are opening. And when you check data from the UBS evidence lab, Premier Inn’s competitive intensity – measured by the number of competitors within a ten-minute drive – has fallen.

Premier Inn also has an outstanding YouGov brand index score, outshining industry peers on both value and quality, while its strong balance sheet lets it expand while others are retreating. Plus, the company has a strong shareholder buyback and dividend policy.

YouGov brand index of hotel chains: value versus quality. Source: YouGov, Company presentation

Whitbread Plc trades at a steeper discount compared to Hilton. Whitbread versus Hilton Hotels 12-month forward price-to-equity ratio discount over time. Source: Refinitiv

Next Plc (retail)

Next is most famous for its retail clothing brand, with a huge international presence both online and offline. Besides that, Next operates a host of other business operations like financing and an online technology platform.

The clothing and accessories retail industry is also highly fragmented and competitive – in fact, retailers who haven’t pulled off a transition to online sales have lost out on market share. But Next had a first-mover advantage here, partly because its old Next Direct business ran online, meaning the right logistics infrastructure and know-how were already in place.

Schroders is a fan of the firm’s long-standing astute management, led by current CEO Lord Simon Wolfson for the last two decades. Plus, the brand as a whole also offers infrastructure, systems, and technology solutions designed to help other brands move online. And with supply chains becoming less global and online business booming, the industry’s barriers to entry are rising. Next seems able to navigate these changes, all while growing its market share.

Berkeley Group Holdings (house-building)

London’s the place to be if you’re building and selling homes. Problem is, it’s also the place to be if you want to pay more – and planning, developing, and selling is more complicated in the city than anywhere else in the country. That’s why big listed builders in the UK tend to focus outside of the capital, leaving independent, private builders to compete in the most competitive market. Berkeley’s the top dog in London, with almost 12% of the city’s market share.

Building rules – specifically fire regulations – have become more strict ever since the Grenfell Tower disaster, leading to fewer new apartments being built or planned in the city. That may be a loss for the city’s other home builders, but for Berkeley, it means its existing market share is only increasing as others retreat. Other London builders usually work with smaller reserves of land, you see, so they face tight financial constraints.

Building regulations are unlikely to loosen, so we might see a real shortage of homes in London in the near future. But according to Schroders, Berkeley’s in a great spot to score big: the firm holds over 12 years' worth of land reserves and is an expert at planning on previously developed land.

Breedon Group Plc (construction)

Breedon is one of four local British construction companies that provide construction and building materials like cement and asphalt. And since products like that are heavy and naturally low value, the industry’s stayed pretty localized. With only four national players dominating the market, Breedon has a chunky share. Plus, the supply of raw materials like crushed rock, sand, and gravel has stayed flat over the past 50 years as almost no new quarries have been sanctioned – a buoy for prices.

Schroders believes that Breedon has strong pricing power in this tougher backdrop of higher energy prices, the rising cost of carbon credits, and the need to go green, setting the firm up to lead the decarbonization drive and win market share over time.

Breedon’s expected to join the UK’s FTSE 250 share index in late 2023, and is looking to expand into the US. There, the industry’s even more fragmented than in the UK, with the top ten companies owning only 40% of the market compared to the 75% of the market controlled by the top five companies in the UK.

The Unite Group Plc (real estate)

Unite is a UK-based company that specializes in owning, managing, and developing purpose-built student accommodation (PBSA). The industry’s barriers to entry are strengthening, driven by higher tax burdens and energy efficiency standards in the UK. Unite’s competitors include other PBSA real estate investment trusts and university-owned accommodation.

Investment is being curtailed in a high-interest-rate environment, so universities are outsourcing student development and accommodation to providers like Unite. And since they’re often long-term contracts, they lend a level of revenue stability. Remember, too, that demand for higher education often stays resilient through economic cycles.

Schroders believes Unite can keep nabbing share in this growing market, as high barriers to entry deter new competitors. Part of that’s because the firm heavily invested in the London land market even after Brexit, while other investors ran for the exit. Case in point: supply of new PBSA is 60% below pre-pandemic levels.

How to decide?

Now, I’m not just going to take Schroders’ word. That said, these stocks still make a tidy starting point for idea generation. Do your own research to analyze whether these firms’ competitive advantages are genuine and sustainable, to assess if they’ll stay successful in the future.

You’ll also need to determine how much you want to tilt your portfolio toward the UK. Bear in mind, if you passively track a benchmark index like the MSCI world, you’ll be exposed to more US tech stocks than you might imagine. I’d suggest looking into the breakdown of each ETF you own and the stocks in your portfolio to determine your existing country split.

Finally, note that the stocks Schroders picked out have a beta much higher than the market. The higher the beta, the higher the volatility of the stock. Put another way, these stocks aren’t expected to fare well in a market downturn.

Source: Refinitiv. The five-year monthly beta of stocks