The largest part of my portfolio focuses on the UK shares of individual companies. And for those, I like to invest at least £1,000 into each one because it minimises the effect of transaction costs compared to investing smaller sums.
My four-step check
So, with £2,000, I’d be inclined to pick two different stocks. And, right now, there are several UK shares that I’d be keen to own for June and beyond.
Generally, I search for four conditions before committing to a share purchase. The first is a high-quality enterprise. And to judge that I look for indicators such as decent returns on equity and invested capital. Another is a good profit margin. And I’m always keen to see a multi-year record of strong incoming cash flow and earnings.
The second condition is momentum in the underlying operations. My ideal business would be one that is on an improving trend with revenues, cash flow, and earnings rising each year.
Thirdly, I want my shares to rise after buying them. So I’m always looking for a catalyst that will likely cause the market to reappraise a company’s prospects. For example, new contracts, enhanced earnings, or other factors that could boost the future value of the enterprise.
And the fourth condition is decent value. If a valuation is too high, even attractive businesses can work out as poor investments. To appraise valuation, I look at the usual indicators such as comparing the share price to earnings, asset values, and cash flow. But because I’m interested in the future performance of a business, I tend to look at forward-looking indicators such as the directors’ estimates for next years’ earnings and other things.
2 UK shares I’d buy right now
UK shares I’d be keen to buy to hold for June and beyond include Sylvania Platinum (LSE: SLP). The company passes all four of my conditions and I think it has a bright future. However, it almost goes without saying that much of the trading outcome depends on the prevailing price of platinum group metals (PGMs).
Most hard commodities and oil are riding high right now, signalling a bullish outlook for the world economy. But if economies and commodity prices turn down, so would my investment in Sylvania Platinum. However, I’m bullish for world economies in the years ahead, so I’d take the risk and buy the stock.
I’m also keen on Premier Foods (LSE: PFD), which is in the middle of engineering a turnaround in the fortunes of the underlying business. The firm’s well-loved brands are being rejuvenated and expanded under a new management team. Trading is going well and the company is sorting its finances out by paying down borrowings and other measures.
I’m keen on the sector because fast-moving consumer goods can be a great source of stable, incoming cash flow with resilience to general macroeconomic wobbles. I’d buy the shares and hold for at least a decade as the company reinvents itself and pursues its growth objectives. However, if earnings fail to rise, or decline again as they have in the past, my investment could lose me money.
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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2021