Bank of America picks the UK's 'high quality' bargain stocks to buy now

Published Thu, Jul 22 202111:30 PM EDT

Lucy Handley @in/lucy-handley-b2b0a61a/@lucyhandley

Analysts from Bank of America have picked several U.K. stocks that they describe as "high quality bargains" with "yield in abundance." The bank said the picks provide some exceptionally attractive opportunities for investors ahead of earnings. The Bank of America analysts said the stocks — all insurance companies — have an average return potential of an estimated 38%. "UK insurance has delivered around a 7% total return YTD [year to date], which in normal times would be pleasing. But in these unusual times, UK insurers have underperformed both the FTSE All-share [index] and UK banks, which is not a common occurrence," the analysts led by Andrew Sinclair wrote in a note published July 20. "We see several high-quality names with reopening exposure at egregiously low valuations," they added. The insurance industry took a hit as companies made claims for business losses due to the coronavirus pandemic. It was also affected by natural disasters and Brexit, with insurance syndicate Lloyd's of London reporting a $1.24 billion pre-tax loss last year. But BofA said most Covid-related claims had now been made, while home insurance companies "benefitted from [a] favourable claims mix," with fewer claims for theft, for example. The bank's top stock picks are Legal & General and Beazley, both of which it said have "scope for p ositive surprise." Legal & General is set for a 7.3% estimated dividend yield this year, which the bank expects to grow 5% each year. "This is an exceptionally attractive entry point for a high-quality name," the analysts stated, calling the stock "a reopening winner left behind." BofA rated the stock a buy and noted that the company reports its results on August 4. Beazley, which operates in the U.S., Europe and Asia, has underperformed the wider insurance market by around 33% in the past year, and has an estimated dividend yield of 3.4% for 2021, BofA said. It is buy-rated on the company, which is due to report Friday. Other buy-rated stocks include Aviva , Direct Line and Quilter . BofA estimated a 5.9% dividend yield for Aviva in 2021, with the company reporting earnings on August 12, while for Direct Line (reporting August 3) the figure is 9.6%. For wealth manager Quilter, they estimated a yield of 3.6% — the company reports earnings on August 11. The bank is also buy-rated on Lancashire (with earnings due July 28) and life insurer Phoenix (reporting August 11). On Lancashire it stated: "We believe the stock looks mispriced at this point in the pricing cycle but think shares could struggle to outperform in the Q3 / US hurricane season."

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