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UK stocks had a tough year in 2023, but I'm optimistic this year will be better. In fact, 2024 could be one of the best years since Brexit.
Already this year, unemployment has fallen, inflation is cooling and rate cuts are on the horizon. The economy is expected to grow as well.
And yet the FTSE 100 and FTSE 250 Both have stalled in January and February, so I'm hopeful that cheap UK shares can be found ahead of a strong performance in 2024.
Here are three at the top of my watch list.
Diversified energy
When most people see a yield of 15% or more, they run to cover before the dividend is slashed.
And yet, Diversified energy (LSE:DEC), an Alabama-based oil and gas company, offers a dividend yield of 29.16% along with cash flows to sustain payouts in future years.
Of course, there is no such thing as free and the company faces serious challenges to its existence.
Its business model of buying old wells and milking them dry has drawn the ire of Democrats, who accuse the company of failing to clean up properly.
The threat of fines or higher costs to remove the wells has raised the market value to $563 million, while net income in the first half was $631 million.
The stock is down 23% year-to-date and I'm watching for a potential turning point.
BAE Systems
The spring budget attracted attention for a number of reasons, but one detail that was overlooked was what Grant Shapps called “the largest defense budget in history” as spending rose by £1.4bn to £55.6bn.
The Secretary of Defense aims to spend 2.5% of GDP on defense “as soon as possible” and his comment came immediately after his German counterpart called for an increase of up to 3.5%.
Of course, this is not a desirable situation, but I think we are waking up to the reality that governments cannot avoid military spending when leaders like Putin exist.
As the UK's largest defense company and the only one in the FTSE 100, BAE Systems (LSE: BA.) will likely be at the heart of much of the outlay.
BAE has a record order book, the stock is already up 12% in 2024 and I think there is a lot more growth in store.
On the risks side, BAE trades at 21 times earnings, which looks expensive, around double the FTSE 100 average.
Overall, though, I'm happy to hold on to the stock and may buy more.
Hargreaves Lansdown
One of the budget headlines was the introduction of the UK ISA – an additional £5,000 tax-free investment allowance, provided the money is invested in UK shares.
Hargreaves Lansdown (LE: HL) shares rose a couple of percent on the news, perhaps due to the possible impact of the British ISA on its investment platform.
Will it have much effect? Well, the British ISA only helps those stuck investing just £20,000 a year instead of £25,000. I'm not sure there are many of us.
But more broadly, Brits are investing now more than ever. An estimated 5 million UK citizens started investing last year, bringing the total to 27 million.
Hargreaves Lansdown shares are up 5% for the year and trade at 12 times earnings. Stocks could be my next purchase.
