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As the stock market heats up, UK share prices have been soaring. For some, this might signal that the easy gains have already been made. But for those with a long-term view, the stock market still holds opportunities — it’s just a matter of identifying those undervalued gems.
The trick is understanding how valuation metrics apply in certain market conditions, particularly during rallies. While some stocks look fully priced, others remain neglected, offering the chance to buy quality businesses at a discount.
What makes a stock undervalued?
In simple terms, an undervalued stock is one trading below what it’s truly worth. This can show up in low price-to-earnings (P/E) ratios, attractive dividend yields or strong cash flow being ignored by the wider market. Importantly, not every cheap share is a bargain — investors should focus on businesses with solid fundamentals, even if they’re temporarily out of favour.
Valuation metrics like price-to-book (P/B) and P/E-to-growth (PEG) ratios, along with enterprise value, can help paint a fuller picture. But often, it’s sentiment and short-term news that create mispricing — especially when the broader stock market is in rally mode.
Consider the following two FTSE 100 stocks.
Prudential
Prudential (LSE: PRU) is a financial giant with a strong presence across Asia and Africa — markets with long-term demographic benefits and growing middle classes.
Despite this, the stock is down over 15% in the past 12 months, partly due to negative sentiment around China. The country is a major earnings driver, and regulatory uncertainty or economic weakness there continues to weigh on performance. Currency fluctuations and geopolitical tensions also pose risks to its bottom line.
But dig into the numbers and I think it has good long-term prospects. The forward P/E ratio sits around 8 and the PEG ratio is below 0.5, indicating the market may be mispricing the company’s growth potential. Analysts forecast over 20% earnings growth in 2025, while the stock currently trades at a deep discount to its average historical valuation.
Prudential is already shifting towards higher-margin insurance and wealth management products, while maintaining a solid balance sheet. With a 12-month price target that implies growth of more than 34%, long-term investors may see this as a compelling entry point.
Unite Group
Unite Group (LSE: UTG), the UK’s largest provider of purpose-built student accommodation, is another underappreciated Footsie stock. The shares are still well below their pre-pandemic highs, but demand for university housing has never been stronger.
Its P/E ratio is low at around 8.7 and it has an ultra-low PEG ratio below 0.1. Earnings are expected to rise sharply as rental income benefits from inflation-linked contracts and growing student numbers. At the same time, its development pipeline and institutional partnerships give it room to scale.
Looking back, I’m a little concerned about interest rates rising again — in the past, this has impacted development margins and asset valuations. A sharp decline in student numbers, particularly from overseas, would also pose a threat. While Unite has weathered recent market cycles well, it’s not immune to broader economic shifts.
Despite macro concerns, analysts are bullish, with consensus price targets suggesting growth of 25% on average over the next year. For investors seeking steady appreciation and exposure to a defensive, cash-generative sector, it looks worthy of consideration.
