Are there any bargains lurking in the UK’s most unloved stocks?

With market attention on AI and the next frontier in space, investors with a more contrarian mindset will be searching unloved parts of the UK stock market for underappreciated gems.

With this mindset, we’ve identified companies that fit the bill using a simple strategy. But before looking at the stocks, it’s essential for investors to understand what contrarian investing really means.

The premise of contrarian investing is that markets have a habit of overreacting to poor news, which can be exploited by looking beyond poor near-term sentiment.

Negative news flow combined with cyclical factors can drive share prices below their true underlying worth, sometimes referred to as intrinsic value.

Contrarian investors look to exploit this ‘disconnect’ between investor sentiment and underlying earnings to potentially benefit from a ‘snap back’ in the share price.

If they get it right, the potential prize is outsized returns and a re-rating of the PE (price to earnings) ratio.

Lower expectations = lower risk

Counterintuitively, unloved stocks which trade significantly below intrinsic value can be less risky than stocks with high valuations because investors have virtually given up on them and growth expectations are low. This means the share price can go up on bad news.

For example, housebuilder Bellway recently reported moderating customer demand through April and May amid higher mortgage rates and upward pressure on material costs due to higher energy prices.

Despite this uninspiring trading update, the shares went up around 3% on 9 June as investors were relieved the update wasn’t even worse.

At the other end of the spectrum, stocks which have high expectations can fall unexpectedly if the news flow becomes ‘less good.’

US chip stock Broadcom fell 12% on 5 June despite releasing record earnings, as expectations got way ahead of reality.

Patience is needed to wait out the full cycle of normalisation, but recognition of intrinsic value often eventually exerts pressure, just like gravity brings objects down to earth.

What are value traps?

An ever-present risk for contrarian investors is value traps, which are stocks and industries in terminal decline. Just because a stock price has fallen does not mean it cannot fall further if prospects for profits continue to deteriorate.

WH Smith shares are down 61% over the year, trading close to their 52-week low, but this didn’t prevent the share price dropping a further 15% on 10 June after the travel retailer issued a profit warning and emergency capital raise.

How do we find unloved stocks?

An easy way to find unloved stocks is to search for those reaching 52-week lows. These stocks have likely been driven to new lows by disappointing trading updates and negative headlines.

This can be a useful starting point to dig into the reasons why a stock has become unloved. Contrarians want to discover if a business has deteriorated as much as implied by the stock price or if the market is overreacting.

We used Stockopedia software to help identify stocks trading within 15% of their lowest price point over the prior 12 months, which have a market value above £400 million.

Most investment platforms provide tools which can produce a list of stocks making new lows and highs, as does the London Stock Exchange.

Housebuilders plumb 14-year lows

UK housebuilders feature heavily on the list of unloved stocks, which is not surprising given the macroeconomic headwinds the sector has faced since the pandemic.

What is particularly noteworthy is that the broader FTSE 350 household goods and home construction index is trading below the levels seen during the Liz Truss related bond market sell-off of late 2022.

Although the sector has seen a few false dawns, there were genuine signs of recovery before the war in Iran snuffed out the latest green shoots.

Companies are adapting to higher costs and lower demand which could yield a strong profit recovery should inflation and interest rate pressures abate. Meanwhile balance sheets remain healthy.

Dunelm – down but not out

Consumer weakness and cost of living pressures continue to impact homewares group Dunelm which issued a profit warning in January, sending the shares down by 20%.

The company lowered its outlook again in April due to the impact of the war in Iran. While Dunelm is in the doghouse, it remains an industry leader with a strong balance sheet and proven ability to take market share.

Some analysts argue the sell-off has gone too far and does not reflect the underlying strengths of Dunelm, providing an attractive entry point for a long-term compounder.

Is the AI-inspired software sell-off overdone?

When Anthropic, the owner of the Claude AI chatbot, released a set of AI software tools in February, it induced a big sell-off in software and data analytics companies.

Online property listings portal Rightmove and retail automotive marketplace Autotrader got caught up in the general narrative that AI could displace their ‘gatekeeper’ status as consumers bypass their portals.

However, both companies own proprietary data and client relationships which are hard to replicate using public information.

Investment bank Peel Hunt recently upgraded Autotrader saying it believes AI is more likely to reinforce its role at the centre of the ecosystem rather than to displace it.

Associated British Foods – Primark spin-off catalyst

A profit warning in January 2026 and subsequent analyst downgrades have weighed on the shares in recent months as the market has struggled to value the firm’s conglomerate structure.

April’s announcement to demerge value fashion retailer Primark, (owned by Associated British Foods) could provide a catalyst to unlock value and simplify the group, allowing investors to better understand the food business.