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The Procter & Gamble of the U.K.

Here at Smart Money Monday, we’re “go anywhere” investors. Sure, I’m biased toward U.S. stocks—after all, I’m based in North Carolina and am most familiar with U.S. reporting standards. That doesn’t keep me from looking around the globe for unique opportunities, though. In fact, my hunt for value has led me to the U.K., where stocks are on sale.

To get a proper read on how U.K. stocks are performing, you need to look at the MSCI United Kingdom Index.

This market cap-weighted index of 82 companies is listed in the United Kingdom and covers 85% of the U.K. stock market. You can play it in the U.S. through the iShares MSCI United Kingdom ETF ( EWU ).

Year to date, EWU is down 22%. That’s basically in line with the S&P 500 ( SPY ), which is down 25% year to date.

However, zoom out over the past five years, EWU is down more than 10%. Compare that to the S&P 500, which is up 40% over that same period:

In short: five years of poor performance have dragged valuations in the U.K. down to near-record levels…

Cheapest in 2 Decades

According to Yardeni Research, the U.K. stock market trades for just nine times earnings. That valuation is in line with 2008 and 2011 levels, both crisis-era periods. In 2008, it was the global financial crisis. And in 2011, the European debt crisis.

That’s cheap.

Compared to other developed economies, the U.K. is the cheapest on a relative basis. The U.S. MSCI Index trades for 16.5 times forward earnings. Japan: 12.1 times earnings. And the European Union: 10.7 times earnings.

Source: Yardeni Research

But as you may know, I don’t typically recommend buying an index. I like to own individual names.

Here’s one I’m tracking…

The U.K.’s P&G

One of the larger companies in the U.K., parts of which have been around for 200+ years, is Reckitt Benckiser Group plc ( RBGLY ). I like to think of it as the Procter & Gamble ( PG ) of the U.K.

RBGLY manufactures and sells health, hygiene, and home products. It owns many household brands you’re likely familiar with, such as Lysol cleaning products, Clearasil skincare products and Enfamil formula for infants.

Based on 2023 analyst expectations, PG currently trades for 21 times forward earnings. RBGLY, on the other hand, trades at just 16 times 2023 earnings estimates.

That’s a pretty stark difference.

In 2017, RBGLY completed a transformational $16.6 billion acquisition of infant formula company Mead Johnson. It borrowed to complete the deal, which left some investors unhappy.

But that was Reckitt then. Today, Reckitt is on a much better footing…

For one, it has paid down debt and is moving toward profitable growth. Plus, Reckitt isn’t just exposed to the U.K. Its revenue is evenly split between North American, European and developing markets. It’s a far-reaching company with a globally diversified business model.

That said, I’m not quite ready to pull the trigger on Reckitt. It had a recent unexpected CEO change, where former CEO Laxman Narasimhan left the company to head up Starbucks (one of my Smart Money Monday recommendations).

So, until Reckitt has some clarity on the future leadership of the company, I’m waiting on the sidelines. But it remains one of my favorite ideas to track in the UK. It’s on my watchlist, so stay tuned for a potential action to take.

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