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UK stocks have been falling as the government’s cost of debt continues to rise. Earlier this week, the yield on 30-year gilts reached 5.36% – its highest level in almost a quarter of a century.
UK 30-year gilt yield 2000-2025
Created at TradingView
A decent return on a relatively safe investment understandably makes investors wary about stocks. But I’m seeing it as an opportunity to be greedy when others are fearful.
Bond yields
Earlier this week, 30-year bonds from the UK government fell to the point they now come with a 5.36% yield. That means someone who invests £10,000 today might expect to get £536 a year until 2055.
While investment returns are never guaranteed, the risk with bonds is typically lower than stocks. So investors shouldn’t buy shares unless they think they’ll get more cash from the business over time.
This comes down to price. Compared to bonds, a company that’s going to be able to distribute £5.36bn a year for the next three decades is attractive when it has a market-cap of £60bn, but not at £150bn.
As a result, higher bond returns lead to lower share prices. This creates potential opportunities and with yields at their highest levels since 1999, this could be a great time to consider buying UK stocks.
Yet Bond yields don’t rise for no reason. The latest data from the Purchasing Managers’ Index (PMI) – a leading economic indicator – isn’t inspiring for Construction, Manufacturing or Services.
In other words, there are genuine reasons to be concerned about the UK economy that shouldn’t be ignored. So while I’m not making a wholesale bet on UK stocks, I’m looking for specific opportunities.
What I’ve been doing
I’ve been buying shares in a company called Judges Scientific (LSE:JDG). Despite falling 10% over the last year, it’s been a long-term winner for investors – up almost 8,000% over the last 20 years.
The core of this spectacular return is revenue growth, which has been absolutely outstanding since 2005. And acquisitions have been a key part of this.
Judges Scientific Revenues 2005-25
Created at TradingView
Growing through acquisitions can be risky. And at a price-to-earnings (P/E) ratio of 38, the stock’s clearly trading at a level that reflects some high expectations in terms of future growth.
It’s worth noting though, that Judges Scientific’s investor materials offer an adjusted earnings figure that discounts amortisation and other one-off costs. On this basis, the current P/E ratio’s 24.
The most recent update also reported lower profits as a result of sales being delayed to the second half of 2024. So I think the headline P/E number makes the stock look more expensive than it really is.
Moreover, the company’s model for focusing on scientific instrument businesses that it can integrate easily is one that’s been proven to work. And I think it should be repeatable in the future.
The importance of being selective
Investors are clearly pessimistic about UK stocks at the moment – and I think some of this is justified. But I’m also on the lookout for opportunities where shares are cheaper than I think they ought to be.
Judges Scientific’s one example. I’m pleased to have added it to my portfolio and I’m looking to buy more in the future.
