Are these the best UK shares to watch in January 2024?

As the UK gears up for Christmas — and traders pin their hopes on the semi-mythical Santa rally — it’s time to take a look at what could be some of the best shares to watch at the start of the new year.

For context, the base rate could now have peaked at 5.25%, but is expected to remain relatively elevated for some time. CPI inflation may be heading in the right direction, but at 4.6%, the crucial measure remains more than double the official Bank of England target. And 2024 will likely be an election year, with all that entails for the investing environment.

But many of the best UK shares may remain undervalued — for example, mid cap chocolatier Hotel Chocolat was bought out in November by Mars at a huge premium, for £534 million. Several analysts have leapt on the deal as symbolic of wider UK corporate under valuations — however, picking stocks ripe for a buyout has always been more of an art than a science.

On the blue-chip end, the FTSE 100 is currently slightly down for the year, though investors will be up overall due to the dividends. Given the S&P 500’s 19.5% increase over 2023 thus far, this could well be called an underperformance — but it’s worth noting that 2022 saw the US index fall into a bear market while the FTSE increased slightly.

Past performance is not an indicator of future returns.

Best UK shares to watch

1. Rolls-Royce

Rolls-Royce (LON: RR) shares have been one of the top performers of 2023, rising by 189% year-to-date. The engineer unveiled plans at its Capital Markets Day to quadruple operating profit over the next four years — and managed to convince JP Morgan analysts to upgrade their ‘neutral’ rating to ‘overweight,’ hiking their price target from 235p to 400p.

Analyst David Perry argues that a higher percentage of Roll’s long-term service agreements (LTSAs) will convert into cash than previously assumed due to ‘radical moves’ enacted by CEO Tufan Erginbilgic who joined the FTSE 100 business in January 2023 with a promise to transform the company.

Rolls also has further catalysts to consider in 2024, including further small modular nuclear reactor developments, and further possible recoveries in the civil aviation and defence divisions.

2. Diageo

Diageo (LON: DGE) shares fell sharply after recent results saw weaker performance in the key Caribbean and Latin American markets — with operating income now only expected to grow by between 5% and 7% compared to between 6% and 9% previously.

With the stock down by 27% over the past year, value investors may feel there is an opportunity. The FTSE 100 company controls a valuable, premium brand portfolio including Johnnie Walker and Dom Perignon, and boasts a relatively strong track record over the past two decades.

CEO Debra Crew has also blamed wider macroeconomic issues, including a weaker global economy and diminished consumer confidence — which has seen customers downgrade to cheaper drink offerings. But no downturn lasts forever, and Christmas is traditionally a time for more luxury purchases.

3. Halfords

Halfords (LON: HFD) shares also plunged in late November after issuing tightened guidance to the lower end of previous expectations — it now expects FY24 underlying pre-tax profits to come in at between £48 million and £53 million, down from £48 million to £58 million.

The company attributed this to weaker demand for discretionary expensive purchases, but also noted that needs based and B2B sales displayed strong growth. And despite the ‘challenging macro environment,’ the retailer still saw revenue in the 26 weeks to 29 September rise by 13.9% to £873.5 million. Further, it remains confident in its mid-term target of £90 million to £110 million underlying pre-tax profit.

Like Diageo, Halfords stock may rise sharply when the recovery arrives.

4. Deliveroo

Deliveroo (LON: ROO) shares are up 53% year-to-date and could have further to go after CEO and founder Will Shu announced that the company plans to expand its offering to non-food retail at its first Capital Markets Day. This will include florists, pharmacies, and electronics.

Management plans to achieve growth in the ‘mid-teens’ in the medium term, and an adjusted earnings margin of over 4% as soon as 2026.

While some non-food retailers are already on the app, Jefferies analysts rate the stock as a ‘buy’ with a 145.3p price target — arguing that ‘the guidance for medium-term GTV growth has finally been updated to reflect this higher cost of capital environment; despite the lower headline numbers, it still represents material upwards pressure to current consensus growth expectations.’

Of course, Deliveroo operates in a fiercely competitive market.

5. On The Beach Group

On the Beach (LON: OTB) has just reported record trading for its 2023 financial year, including record Group Total Transaction Value, as trading resumed normal patterns after pandemic-era disruption.

Group revenue rose from £143 million in the last financial year to £170 million in 2023, while passenger numbers rose by 13% in summer 2023 compared to summer 2022.

It seems strategic investments during the weaker period of trading are paying off, including substantial redevelopment of its website and the launch of a new mobile app. Further, winter bookings are up by 34% — and the company plans to reinstate its dividend during FY24.

Of course, oil remains elevated as do wider geopolitical tensions. But pent-up travel demand appears far from spent.