These 2 UK stocks are latest additions to Bernstein’s Q2 Best Idea list

Investing.com -- SSE (LON:SSE) and Shell (NYSE:SHEL) (LON:SHEL) are the latest additions to Bernstein’s Best Ideas list for the second quarter of 2025, reflecting the brokerage’s preference for defensive plays and resilient income in the current volatile macro environment.

Bernstein analysts upgraded SSE to a Best Idea based on its “defensive growth at a compelling valuation,” supported by strong regulatory visibility and a balanced asset portfolio.

The investment bank expects SSE to grow earnings at an 8% compound annual growth rate (CAGR) between fiscal year 2025 (FY25) and FY31, with about 46% of adjusted EBIT driven by regulated networks and another 43% from inflation-linked renewables.

“We admire the company’s portfolio, which offers strong, predictable growth with defensive characteristics,” analyst Deepa Venkateswaran wrote.

She sees several upcoming catalysts for SSE in the next twelve months, including regulatory decisions on networks, the UK’s AR7 renewables auction, and more clarity on zonal pricing.

Concerns about SSE’s balance sheet and zonal pricing exposure were downplayed. “Fears around funding and zonal pricing have been overblown,” Venkateswaran said.

The analyst noted that the estimated £2 billion funding gap could be managed through hybrid instruments or asset disposals, while zonal pricing would have only a 2% impact on earnings per share (EPS).

Shell also earned a spot on the Q2 Best Ideas list due to its ability to maintain shareholder returns even under stress.

“We conclude it can continue its sizable buyback program, grow per share dividends at 2% per annum (pa), and remain within the A-credit rating metrics,” analysts led by Irene Himona said in a separate note, stressing Shell’s low breakeven oil price and robust financials.

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The brokerage argues Shell is “priced for recession” and trades below what it considers a fair value in a $60 per barrel oil scenario.

The analysts believe that the energy giant’s track record “creates credibility and trust,” pointing out that the company has reduced net debt by $6 billion since end-2022 and distributed $46 billion in dividends and buybacks while improving cash discipline.

The stock “offers an attractive entry point,” the analysts said, especially for investors who “value prioritized shareholder payouts, the highest free cash flow yield in the sector and the security/ reassurance of a fortress-like balance sheet, in what are clearly, uncertain times.”

Both SSE and Shell are rated Outperform at Bernstein.

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