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Value stocks can go nowhere for years. But when they take off, it’s action stations. That’s certainly the case with two FTSE 100 recovery plays that have been falling for years, despite looking incredibly cheap for most of that time.
Investors in Prudential (LSE: PRU) and Schroders (LSE: SDR) have had a miserable time of it. Until now. Any investor lucky enough to take the plunge just one month ago will have seen remarkable gains. Both are up just over 20% in that time.
If they’d split a £20,000 Stocks and Shares ISA evenly between these two struggling blue-chips in mid-January, they’d now be sitting on around £24,000. When value stocks go, they go.
Prudential’s shares are fighting back
Given that they’re both in the financials sector, it may not be a coincidence that they’re behaving in a very similar way.
But what went wrong for these two in the first place, and is this recovery sustainable?
Both have faced long-term structural and macroeconomic challenges. Prudential, a heavyweight in insurance and financial services, was supposed to fly after making the pivot to booming Asia.
While there’s a brilliant opportunity in the emerging middle class, this also exposed the company to Chinese economic volatility. Investor confidence wavered as China’s property crisis and sluggish growth hit earnings hopes.
Half-year adjusted operating profits still climbed 9% to $1.5bn, but investors had hoped for more.
Schroders meanwhile, has been hit by volatile stock markets and the shift towards passive investing. This has hit demand for active fund managers and squeezed fees too. Q3 outflows hit £2.3bn.
So why the sudden change? Prudential was lifted by improving sentiment towards China, although the recovery still looks fragile to me, and trade wars loom.
News that Prudential is evaluating a potential listing of ICICI Prudential Asset Management, its joint venture with Indian financial services group ICICI Bank, gave the shares another helpful kick.
Schroders has benefitted from the rally in UK and global markets. With interest rates potentially peaking and the outlook for assets that have some risk improving, investors have rotated back into shares. This could lift inflows and assets under management.
Broker RBC Capital Markets upgraded Schroders to Outperform, which gave it another lift. With the price-to-earnings ratio near a 10-year low of just 10 times, there’s an opportunity to consider here. Prudential looks pricier at 15.5 times earnings.
Schroders has a stellar yield
Companies that have underperformed for years can seem like they’re going nowhere – until the market suddenly re-evaluates them. When that happens, share prices can climb rapidly as investors rush to reprice the business in line with improved expectations.
But can it continue?
If China’s rebound is sustained, Prudential could have further to run. If financial markets continue to stabilise and fund inflows return, so could Schroders.
I’m wary of buying any stock straight after a spike. But I think both stocks are worth considering for investors who want wider exposure to FTSE 100 financials. Schroders’ bumper 5.8% yield tempts more than Prudential’s 2.3%.
For investors willing to ride out volatility, there may still be value to unlock. But as ever when considering value stocks, patience is required
