I’m looking at the UK for stocks to buy this month. The ‘Magnificent 7’ (Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla) have been on fire, but they look expensive as a result.
By contrast, a couple of UK shares have been falling out of favour with the market recently. I think investors are overreacting to some short-term headwinds, though, creating a buying opportunity.
Halma
The Halma (LSE:HLMA) share price fell by almost 9% in September, as the industrial conglomerate reported slowing acquisitions. To my mind, this looks like something of an overreaction.
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With shares trading at a price-to-earnings (P/E) ratio of 31, investors are clearly expecting growth from the business. And if this doesn’t materialise, the stock is likely to be a bad investment.
The stock has been treading water for some time, but the underlying business hasn’t. The share price might be at 2019 levels, but annual revenues have gone from £1.2bn to £1.8bn in that time.
When the stock was trading at a P/E ratio of 44 in 2019, it might well have been overvalued. But I think the underlying business has caught up to its stock market valuation significantly since then.
As I see it, the pullback in the share price is a buying opportunity. So I think investors should look seriously at the possibility of exploiting some unwarranted pessimism by buying the stock in October.
Forterra
After a 21% drop since January, shares in Forterra (LSE:FORT) are trading at a five-year low. But in my view, the brick company’s long-term prospects are much better than the current price implies.
The firm has been investing recently in expanding its manufacturing capacity. But a downturn in the property market and the risk of a recession in the near future make this look like a mistake.
I think investors are being short-sighted here, though. To my mind, the weakness in the housing market is a short-term issue for an industry that has strong long-term tailwinds behind it.
As a result, I expect the company’s investments to pay off well over time. Returns might be a few years away, but I don’t see the structural shortage of housing in the UK going away any time soon.
Warren Buffett teaches that the stock market is a device for transferring wealth from the impatient to the patient. Over time, I think Forterra shares could be a great long-term investment at today’s prices.
Contrarian investing
Tesla and the rest of the Magnificent 7 are great businesses, but they come with share prices that reflect this. So I find it hard to see the upside for investors in these stocks right now.
I think there are better opportunities in stocks that have fallen out of favour with the market lately. This is the case with both Halma and Forterra.
In both cases, it looks to me as though investors are overreacting to some short-term issues. That’s why both are on my list of stocks to buy this month.
