Should You Add Rio Tinto Group (RIO) to Your Portfolio Now?
We recently compiled a list of the 10 Best Undervalued UK Stocks To Buy Now. In this article, we are going to take a look at where Rio Tinto Group (NYSE:RIO) stands against the other undervalued UK stocks.
The Economy of the United Kingdom
According to a report by KPMG, the economy of the UK is going through a combination of consumption tailwinds and falling inflation which is expected to support modest positive growth in the country for the remainder of 2024 and in 2025. The United Kingdom’s economy is projected to achieve GDP growth of 0.5% in 2024, and 0.9% in 2025, while inflation is expected to hold steady at 2.6% in both 2024 and 2025. Unemployment rates are also projected to be 4.5% in 2024 and 4.9% in 2025. The interest rates are anticipated to drop towards 3% by the end of 2025 and elections are likely to resolve political uncertainty, which would encourage business. However, geopolitical uncertainty, conflicts, and trade tensions could lead to inflation spikes and sharp shifts in monetary policies. Despite the uncertainty, KPMG's analysts remain optimistic about the future. Yael Selfin Vice Chair and Chief Economist at KPMG United Kingdom said:
“Global economic prospects are better for 2025, with inflation expected to return towards target and central banks more confident to cut policy rates from the current restrictive levels. The silver lining is a tailwind for big-ticket consumer purchases and business investment. Merger and acquisition activity could also continue to gather steam, as financial conditions ease and dry powder is deployed. However, the uncertainty remains around the political shifts, which could see more insular and protectionist economic policies.”
Investors view the UK market as particularly appealing due to its current valuations, which are similar to those of emerging markets when measured on a forward price-to-earnings basis. The UK equity index stands out for its substantial exposure to the energy sector, which could benefit significantly if the global economy outperforms expectations. Additionally, in times of escalating geopolitical tensions, the energy sector might also see gains, driven by rising prices. The composition of the UK equity market is well-structured, especially in terms of dividend yields and volatility. Compared to European equities, UK stocks are less volatile and offer higher dividend yields, making them an attractive option for investors at this time. Goldman Sachs is also anticipating modest growth in the United Kingdom’s 2025 and 2026 economic growth and forecasts the FTSE 100 Index to rise to 7,900 by the end of 2024. Goldman Sachs said:
“Low valuation, improving global demand and low supply aiding commodities stocks, and continued buybacks all support FTSE 100. We do not expect UKX to underperform as it did in 2023,”
According to Emma Wall, Head of Investment Analysis at Hargreaves Lansdown, the UK offers one of the best value opportunities among developed markets, particularly for those looking for undervalued investments. Despite its high performance in the FTSE 100, it is highlighted as being on a 45% discount compared to the U.S. market. Emma Wall sees the best value opportunity in the UK, citing the significant discount, international revenues, lack of leverage, and expectations of high dividend payouts as key reasons for this analysis.
The UK market presents a unique and compelling opportunity for investors, as the global economy shows signs of improvement and inflation stabilizes, the UK will benefit from economic growth despite some uncertainties, with that in context let’s take a look at the 10 best undervalued UK stocks to buy now.
Our Methodology
For this article, we used the Finviz screener to screen for UK-based companies that are trading at a forward P/E ratio of under 20 as of August 9. We listed the stocks according to their hedge fund sentiment, which was taken from our database of 920 elite hedge funds as of Q1 of 2024.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Aerial view of an open pit mine, with workers extracting minerals.
Rio Tinto Group (NYSE:RIO)
Number of Hedge Fund Investors: 37
Forward P/E ratio as of August 10: 8.55
Rio Tinto Group (NYSE:RIO) is a leading global mining and metals company that generates revenue by exploring, mining, and processing a variety of mineral resources and selling them to industrial customers, including manufacturers, construction firms, and energy producers. The company is known for its focus on operational efficiency and cost control by implementing advanced technologies and innovative mining practices which enhances its profitability. The company's primary products include iron ore, aluminum, copper, diamonds, gold, energy products, and industrial minerals such as borates and titanium dioxide. Rio Tinto Group (NYSE:RIO) has a market cap of $101.90 billion as of August 10 and is one of three the largest mining companies in the world. Rio Tinto Group (NYSE:RIO) is strategically well-positioned to capitalize on the expected sustained commodity demand created by decarbonization, shifting regional industrial policies, and geopolitics. As of the first quarter, the stock is held by 37 hedge funds with stakes amounting to $1.42 billion. Fisher Asset Management owns the largest number of stocks in the company with a market worth $1.05 billion as of March 31.
Rio Tinto Group (NYSE:RIO) has been making substantial financial investments and expanding its low-carbon aluminum and iron production capabilities by acquiring strategic aluminum assets, leasing solar parks, and setting up long-term renewable energy contracts to position itself as a key player in the global low-carbon economy. On June 11, Rio Tinto Group (NYSE:RIO) agreed to acquire an 11.65% stake in Boyne Smelters Ltd. from Mitsubishi Corporation, which operates the Boyne Island aluminum smelter in Gladstone, Australia. On July 1, Rio Tinto Group (NYSE:RIO) announced a $285 million investment, in partnership with the Quebec government for the construction of a carbon-free aluminum electrolysis plant in Quebec, with an annual production capacity of 2,500 tonnes of aluminum without any direct greenhouse gas emissions. During the year 2023, Rio Tinto Group (NYSE:RIO) invested $1.1 billion to expand its "low-carbon" aluminum smelter at Complexe in Quebec, Canada. The Canadian government is supporting these efforts and has invested in the ELYSIS technology, the Quebec government also contributed around $113 million to the smelter expansion.
The stock is trading at a forward PE of 8.55, a 44% discount to its sector. Earnings per share are expected to increase by 0.6% which may not sound compelling, however, the stock trades at $63.24 as of August 10 and analysts forecast that the share price will increase by 26% and reach $83 over the next twelve months. The company has a total debt of $14.35 billion and has about $10.75 billion in cash.
Overall RIO ranks 5th on our list of the best undervalued UK stocks to buy. You can visit 10 Best Undervalued UK Stocks To Buy Now to see the other undervalued UK stocks that are on hedge funds’ radar. While we acknowledge the potential of RIO as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than RIO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.