Investment bank Bernstein has named a slew of U.K. stocks it says are trading at their lowest levels since 2000, when compared to Europe, and which it strongly believes will rally over the coming months. "UK equities are cheaper than they have been relative to Europe since 2000," Bernstein's analysts wrote in a research note dated April 20. "While UK funds have not seen an acceleration in outflows to the same extent that European funds have post the invasion of Ukraine, UK equity funds have been seeing net outflows for even longer than European funds," the analysts, led by Sarah McCarthy, added. Stocks in the U.K. are trading at 0.8 times the 12-month forward price-to-earnings (forward P/E) of European stocks, a discount last seen in 2000, the analysts stated. The forward P/E is a forecast of a stock's likely performance based on estimated earnings-per-share. The bank asked its analysts to name their best ideas for U.K. stocks with "strong conviction on upside." Among their picks are grocer Tesco , power company SSE , caterer Compass Group , broadcaster ITV , oil major BP , and telco Vodafone . Tesco is Bernstein's top choice in food retail, with analysts giving it a potential upside of 25%. "It will ride the inflationary wave with strong fundamentals and attractive valuation," the analysts wrote. The bank also likes its price matching with discounters such as Aldi, and said it had strong loyalty and execution. Read more Morgan Stanley and Barclays name their top global stocks with upside potential The outlook is murky for struggling chip stocks. Here’s where to find the best opportunities New U.S. cannabis markets are opening. A guide to what investors need to know Bernstein called SSE's renewables arm "the jewel in the crown of the company" with particular strength in offshore wind power. It also noted its earnings from renewables are "100% inflation linked." The bank rated catering company Compass Group as an outperform, liking its scale – with more than 55,000 clients — and strong balance sheet. "There is a misconception that the pandemic has made the industry structurally less attractive — reality is the opposite (more outsourcing, faster growth, higher margins)," the analysts added. It gave the stock a 14% potential upside. ITV has a "fighting chance" after investing in its online service as people increasingly stream content, according to the bank. "Thanks to low leverage and good cash generation, ITV has options for M & A or buybacks on top of a 6% dividend yield," Bernstein stated. BP is one of Bernstein's top picks for the year, with a 45% potential upside to its target price. "BP has signaled one of the most aggressive Integrated Oil Company (IOC) to Integrated Energy Company (IEC) strategies and we expect to see the earnings mix tilt towards these new businesses sooner than others this decade," the analysts stated. Vodafone is "doing the right things" to generate organic growth, according to the bank, which likes its network sharing deals with the likes of Telecom Italia and Orange in Spain. Bernstein estimated a dividend yield of 6% for the 2022-23 financial year. U.K. earnings are set to grow by 2.6% in 2023, the lowest of any region, Bernstein estimated. This compares with 6.7% in Europe and 9.7% in the U.S., per the bank's research. European stocks traded higher Thursday afternoon , including Nestle , engineering group ABB and chemicals company AkzoNobel , as investors watched developments in Ukraine. - CNBC's Holly Ellyatt contributed to this report.
