Editor’s note: a version of this article previously stated “Valuation is difficult, with no profit expected this year. But forecasts suggest a tiny one for 2023, followed by further earnings growth”. This has since been clarified in the article.
I think I see the greatest number of top-value UK shares out there that we’ve had for some time. And it makes my investing decisions tricky. I have a shortlist of more than a dozen that I’d be happy to buy right now.
I’m tempted to top up on some fallen ones I already own, and perhaps buy some more Persimmon or Boohoo. But I really want to improve my diversification. Today I’m examining three that I might buy next.
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Cybersecurity
I come back to Darktrace (LSE: DARK) whenever I’m thinking about a purchase. The cybersecurity specialist was a bit of a bubble stock in 2021, when it appeared overhyped.
Since then, the share price has fallen back, and the short-sellers have moved on to other pickings. Valuation is difficult, with no profit expected in FY22-23 (year-end in June). But forecasts suggest a tiny one for FY23-24, followed by further earnings growth.
Traditional advice might be to avoid growth stocks when we’re heading into a recession. But I rarely pay much attention to that. As long as I think Darktrace can make it through to profit without any great challenges, then the long-term potential is all that matters to me.
It’s risky, and I usually invest for dividends. But part of me wants to buy some.
Investment
The investment business itself is under fierce pressure. That brings M&G (LSE: MNG) to mind. I see the investment manager as a good long-term prospect, and its recent share price weakness makes me think it’s a buy.
We’re looking at a 12% fall over the past 12 months. And that’s pushed the forecast dividend yield up above 10%. I think it’s unlikely to be sustained at that level, and I half expect a cut to be on the cards. But I see sufficient safety for M&G to absorb the coming pressure and keep earning cash for shareholders.
The main risk I see is a threat to incoming investment funds as the likely recession progresses over the next year or two. So there could be some short-term weakness ahead.
Shopping
I keep coming back to a perennial favourite, which I’ve never bought. I’m thinking about Tesco (LSE: TSCO), the UK’s leading supermarket chain. The share price has fallen 17% over the past 12 months.
But it’s been picking up since October. Forecasts put the shares on a price-to-earnings (P/E) ratio of under 12, with a 4.5% dividend yield.
Neither of those measures are the best on the UK stock market. But for a top quality FTSE 100 company with good defensive qualities, Tesco looks cheap to me.
The risk is short-term price competition. I can see Lidl and Aldi continuing to advance their market share, and I expect margins to be squeezed. Still, Tesco looks solid with 27% of the market, according to Kantar.
Verdict
All three of these face their own individual risks. But taken together, I’d buy them all if I had enough money. As it is, they remain among the top candidates for my next investment.
