3 FTSE 100 shares that could be undervalued after the election

Robert Stephens, CFA, considers why these FTSE 100 stocks may offer good value for money after the Conservative landslide last Thursday.

Fears surrounding a Jeremy Corbyn minority government may have contributed to low valuations for FTSE 100 shares such as SSE (LON:SSE), Next (LON:NXT) and Berkeley Group (LON:BKG) in recent years. Investors have understandably been cautious about the prospects for the economy under a ‘tax and spend’ Labour manifesto that leaned heavily on left-wing policies.

With that risk having evaporated in Thursday’s landslide Conservative win, the valuations of those three stocks could move higher as they deliver on their growth strategies. Therefore, they could offer investment potential after a turbulent period.

Next

A Boris Johnson election victory may not transform weak consumer confidence in the near term. But a continued trend of low unemployment, rapid wage growth and a resolution to Brexit may provide improved operating conditions for retailers such as Next.

Its growth plan centres on an online platform where it has developed a £500m aggregation business that aims to be the first choice for consumers seeking clothing and home products. It is investing in warehousing and its wider supply chain, while aiming to reduce its reliance on the UK through increasing international investment.

Next’s price-earnings ratio of 15.8 may not sound all that cheap compared to other retailers. But its ability to cut costs through renegotiations with its landlords and cater to an increasingly online world could lead to rising profitability.

Berkeley Group

London house prices have been under pressure in the past few years. Prime housebuilder Berkeley Group, which builds around 10% of properties in the capital, has therefore suffered from challenging operating conditions.

This has encouraged it to diversify into new regions, such as Birmingham, while taking on long-term projects that, while complex, could have large payoffs further down the line. They are keeping its profitability on track, and it is expected to return £280m to its shareholders per year until 2025.

Greater political stability and a more business-friendly fiscal policy may encourage rising demand for property in London. Berkeley Group’s shares have already surged 16% higher since the election result was announced. Their forward price-earnings ratio of 15.8 suggests that further capital growth may be ahead.

SSE

The threat of nationalisation under a Labour government rightly caused utility companies such as SSE to become less popular among investors. A Conservative victory means that shareholders can look ahead with greater optimism to the delivery of the company’s strategy of focusing on renewables.

The UK’s commitment to becoming ‘greener’ is unlikely to waver under Boris Johnson. It is expected to become carbon-neutral by 2050, which could benefit SSE as it shifts the focus of its asset base towards opportunities held within its renewables pipeline. The company’s sale of its energy services division should help to speed-up this process, while a 5.6% dividend yield makes the stock an attractive income opportunity.

SSE’s forward price-earnings ratio of 14 is less appealing than it was prior to the election. Its shares have moved 10% higher since then but could have further growth potential due to their income prospects.