Large, Oversold UK Stocks Hint at Rebound

UK stocks have turned lower this week as higher crude prices and pessimism about the situation in the Middle East have overshadowed some positive earnings, leaving several large-cap stocks oversold.

Largest UK Stocks Trading Under 30 RSI

• Imperial Brands (IMB): RSI 27
• Reckitt Benckiser (RKT): RSI 27
• Unilver (ULVR): RSI 27
• Goodwin (GDWN): RSI 28

Higher Fuel Prices Weigh on FTSE 100

The lack of progress in securing a peace deal in the Middle East has kept crude prices elevated and clouded the outlook for UK equities, with the premier British stock index set for its sixth consecutive loss on Friday. A barrage of earnings on Thursday was largely positive, with virtually all reporting firms at least affirming their guidance while still expressing concern about the potential effects of the war. However, the FTSE 100 is on track to erase all gains since hopes of a US-Iran ceasefire earlier in the month helped drive a surge in investor optimism.

Markets have apparently already priced in risks for airlines, although budget airlines such as Wizz and EasyJet have garnered significant short interest amid higher fuel prices. International airlines, like Finnair, have suggested they could "tanker" fuel from outside of Europe to ease supply issues, but that might be more difficult for budget airlines with a high concentration of inter-Europe flights. Other underperforming shares are major UK grocers Tesco and Sainsbury after they reported earnings earlier in the week and warned that uncertainty in the Middle East could impact sales. Energy firms like Shell and BP have seen wider fluctuations in line with crude prices. A few companies have particularly disappointed investors and traded down so quickly that they fell below the 30 level on the daily RSI. Bargain-hunting traders might see a rebound opportunity among some of these oversold firms.

Imperial Brands Facing Several Headwinds

The UK's leading tobacco firm would understandably be underperforming after Parliament approved a ban on smoking for people born after 2008. However, other factors have left traders pessimistic about the stock. Over the last week, UBS and Morgan Stanley both cut their ratings for the company, with the former citing increased competition in the company's main market in the US. UBS, which cut its growth outlook for "next-generation" product sales this year, also expects challenges in the shift away from cigarettes. The company has been aggressively buying back shares recently, which could have undermined its available cash in an effort to prop up sales. However, the recent stock moves have left it with a PE ratio of just 11.

Reckitt Benckiser's Earnings Disappoint

One of the relatively few companies to report earnings below consensus this week was Reckitt Benckiser, which saw its share price fall into oversold territory right afterwards. Not only did its earnings miss forecasts, but analysts are also sceptical about the company's guidance, as consumers face higher costs and may limit spending. Reckitt Benckiser reported like-for-like sales growth of 0.6%, below the 1.6% analysts had hoped for. However, it should be noted that a slow cold and flu season was largely responsible for the underperformance, and that could clear up in the future.

Unilever Underperforming on Transformation

There is no specific catalyst for Unilever's most recent underperformance, and it might simply be attributed to investor impatience as it grinds through its transformation. The long-awaited spin-off of its ice cream unit last year seems justified, as Magnum shares have underperformed since then, further weighing on the company's valuation. Traders might be uncertain about what will happen with the deal to sell its food business to McCormick. Analysts, however, are increasingly bullish about the company precisely because of its falling share price, with RBC being the latest to upgrade Unilever. The broker says that concerns are now priced into the share, and it offers a comparatively attractive valuation with a PE ratio of 19.