2 UK shares investors should consider keeping on a tight leash

These UK shares seem to have robust long-term tailwinds, but they’re also tackling headwinds that could result in less-than-impressive investment returns.

| More on:
Young Woman Drives Car With Dog in Back Seat

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Many UK shares have thrived throughout 2024, some even delivering triple-digit returns. However, not all businesses have been so fortunate. Despite their popularity, these two stocks seem to have fallen into some hot water recently. I don’t hold shares in either and I think investors should be cautious too if they’re considering them for their portfolios.

Excitement surrounding homebuilders

One of the big promises from the newly elected Labour government is to simplify the planning permission process for building residential homes. Pairing this with falling mortgage rates and rising house prices, homebuilders like Persimmon (LSE:PSN) seem to be on track for some much-improved performance as we move into 2025.

Evidence of this is already starting to appear in the firm’s results. As per its latest third-quarter results, management reiterated its target of delivering 10,500 homes by the end of 2024 versus the 9,922 delivered in 2023. And if this upward momentum continues, the group might soon be back to completing close to 15,000 a year.

However, the UK has long struggled when it comes to homebuilding targets. And looking at the latest data from the S&P Global UK Construction PMI, British homebuilding’s once again in contraction.

To date, Persimmon’s completed 5,861 homes since the start of the year. This means it needs to complete another 4,639 to hit its target. Historically, the fourth quarter has always been Persimmon’s most productive period. But that leaves little room for error if it wants to hit its goal, especially since it’s a 10% boost compared to 2023.

Any unexpected delays or material shortages could result in shareholders being disappointed. And with the UK still tackling a shortage of skilled tradesmen to actually build the houses, the entire sector’s long-term potential continues to be handicapped, even if planning permission’s easier to obtain.

The future of tobacco

Tobacco enterprises aren’t for everyone. Ignoring the moral ambiguity of investing in these businesses, companies like British American Tobacco (LSE:BATS) are operating in an increasingly hostile regulatory environment. Despite this, management’s continued to expand shareholder payouts. And even today, the stock continues to offer a terrific 8% yield, even after shares climbed almost 30% in 2024.

Today, there are an estimated 1.25 billion smokers worldwide, according to the World Health Organisation. And the general consensus is that this number will drop over time. After all, the smoking rate’s been steadily declining over the last 20 years. However, when factoring in population growth, analysts at Panmure Liberum have estimated the total number of smokers to fall only to 1.2 billion by 2050.

It sounds like these UK tobacco shares have plenty of longevity. But personally, I’m becoming increasingly less convinced. Around 80% of the smoking population live in low- and middle-income countries outside the US, UK, and Europe. Yet 80% of British American’s revenue comes from these richer countries, which is also where tobacco regulation is becoming increasingly strict.

No doubt that’s why management’s been aggressively investing in alternative products such as vapes. However, the growth of these products is starting to wobble as competition in this new market skyrockets.

For the time being, British American seems to be holding firm and generating the needed cash flows to maintain dividends. But the battle’s seemingly becoming harder. And if its foray into the tobacco alternative market fails, its status as a Dividend Aristocrat could soon be over.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco P.l.c. 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.

More on Investing Articles

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Investing Articles

This FTSE 100 stock’s down 21% since I bought! Have I made a BIG mistake?

FTSE 100 stocks are supposed to be less volatile. But our writer recently purchased one that’s making him question this…

Read more »

Engineer Project Manager Talks With Scientist working on Computer
Investing Articles

Will the stock market rise in 2025, and how high could it go?

The stock market's up by double digits, but can it maintain its momentum in 2025? And which stocks should investors…

Read more »

Investing For Beginners

If an investor puts £750 a month in a Stocks and Shares ISA, here’s what they could have in 10 years

Edward Sheldon looks at how Stocks and Shares ISAs can help build wealth and also highlights some investment strategies to…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

1 US penny stock I’m avoiding like the plague

This medical penny stock's trying to capture a $100bn market opportunity after recently receiving FDA approval. But personally, I’m not…

Read more »

Investing Articles

£5,000 in savings? Here’s how to try and turn that into a £500 passive income

Zaven Boyrazian outlines how a £5,000 lump sum investment could potentially transformed into a £500 passive income stream within as…

Read more »

Elderly man giving a Christmas present to his wife
Investing Articles

Forget saving! Here’s a FTSE 100 share I’m planning to buy before Christmas

This FTSE 100 share looks like a brilliant bargain at current prices, says Royston Wild. Here's why it's on his…

Read more »

Investing Articles

With P/Es below 8, which of these FTSE 100 shares should investors consider?

The following FTSE shares are on sale, trading at rock-bottom earnings multiples. But which could be the better buy for…

Read more »

Young black man looking at phone while on the London Overground
Investing Articles

1 FTSE 100 stock I’ll avoid like the plague in 2025!

This FTSE 100 stock offers excellent all-round value at today's prices. But Royston Wild thinks the firm's low price underlines…

Read more »