Three strong British stocks at a discount

Three British stocks with solid balance sheets and strong cash flows are highlighted by Temple Bar Investment Trust fund managers Ian Lance and Nick Purves

Value investing is the approach that Temple Bar uses. Purchasing a company's stock for less than its intrinsic value is known as this. This strategy creates a "margin of safety" by purchasing at a discount. Although the share price of an undervalued company may decline further in the short term, other investors should eventually recognize the built-in value, causing the share price to increase to reflect the stock's intrinsic value. Value strategies have outperformed stock markets in the long run, according to a wealth of empirical data.

Of course, there are reasons why some businesses are inexpensive, but we think the best opportunities for attractive long-term investment returns come from investing in high-quality but undervalued businesses with solid balance sheets and strong cash flows.

Three British stocks that you should include in your portfolio.

Despite its longstanding reputation as an asset manager, Aberdeen Group (LSE: ABDN) has managed to diversify and now runs three distinct businesses: Adviser, a business-to-business (B2B) division; Investments asset management; and Interactive Investor (ii), a consumer trading platform. According to assets under management, Aberdeen's B2B business is the second-largest advice platform in the UK, and its direct-to-consumer investment platform is the second-largest.

In 2024, the group hired a new CEO to help increase the company's profitability. We see a potential restructuring as a free call option embedded in today's valuation because we estimate that a restructured Aberdeen investments business could be worth an additional 1.5 billion. Financial assets totaling £2.1 billion are also included in the balance sheet. We consider the shares to be substantially undervalued after adding these financial assets to our estimated intrinsic value of the three companies.

Smith and Nephew (LSE: SN) is a company that makes medical equipment. It has been having trouble for a while, losing market share in its important orthopaedics business and experiencing low productivity. A 12-point plan has been put in place to promote financial improvement. If it is successful, it might result in increased margins, productivity gains, sales growth, cash flow, and shareholder returns. The company has produced yearly sales growth of more than 5% and increased margins over the past 18 months, which are unmistakable indications that the turnaround is working. We think Smith & Nephew is a good company with solid market positions in comparatively stable but expanding markets, and we anticipate significant profit growth in the medium run.

Johnson Matthey (LSE: JMAT) is a company that specializes in chemicals. Historically, JMAT has produced consistent levels of operating profit and sales. Investments in hydrogen have hindered this consistency in recent years. The stock has derated due to worries about hydrogen, a drop in the price of platinum-group metals, and the switch to electric vehicles. Since then, management has shifted their attention to maximizing cash flows and shareholder returns after realizing the risk of pursuing growth in unproven technologies.

JMAT announced the sale of its Catalyst Technologies division for £1.6 billion at the time of its May results, with a plan to give shareholders back 90% of the proceeds. At the time of the announcement, two-thirds of the company's market value came from sales proceeds, even though this division only makes up 25% of its profits. The news was well received by the shares. The shares, in our opinion, are still considerably cheap.