The goal of any investor is to find cheap businesses and add them to their portfolio. This seems easy enough and it’s the key to billionaire Warren Buffett’s investing strategy. Very little is known about how the new Covid variant will affect our lives. But fears around it have caused markets to slip everywhere around the world. Not one to sit on the side-lines, I’ve been taking this opportunity to find the best cheap UK shares I can.
Undervalued, not cheap
While cheap may be the word we all like to hear, there is a difference between it and undervalued. Something that is cheap may simply not be worth that much. What I want is to find shares that cost very little, but that I also think are worth more.
How much has a company made over the past few years? What are its profit margins? Does it need to pay down huge sums of debt or keep investors interested with large dividends? All of these factors are important in my decision making under ordinary circumstances, but they’re vital when markets are falling. How else can I predict which shares will regain their value?
While it is tempting to simply buy the shares that have fallen the most, I’m choosing not to do this. Many of the worst effected companies are ones hurt by lockdowns and travel restrictions. EazyJet and IAG have fallen 18% and 23% respectively since November.
These companies, and others like them, were already struggling through the pandemic. Under ordinary circumstances, budget airlines like eazyjet operate on very small profit margins anyway. The pandemic forced them to take on large amounts of debt to stay afloat, which, with those aforementioned small profit margins, will take decades to pay back.
To find a share that is truly undervalued, I need to think of a company whose businesses have thrived over the last few months, but has still been affected by the overall market downturn.
If this was March 2020, I would have said Amazon or Google. Tech companies have few overheads and allow us to do things from the comfort of our home. Unfortunately, the world seems to have learned this now. Google’s share price only fell by 5% over the course of November, but has since recovered.
If we do enter another lockdown then my top British company is Naked Wines. Naked Wines is a wine delivery service which offers customers affordable access to high quality wines from around the world. The company often has exclusive access to wines and is able to offer even greater affordability through its ‘angels’ subscription service. Naked Wines saw a year of unprecedented growth over the 2020 lockdown period and, while growth has slowed in recent months subscriber numbers remain strong and it has been able to pay down a lot of its debt.
There is a risk of course that the novelty of home delivered wines may wear off, especially once the pandemic is in the rear-view mirror. The share price has already fallen 22% since September. However, I personally I think this one has a lot of staying power. I’ve grown fond of the service and intend to remain a customer in the future.
The share price has been fallen by about 10% since November and trades for about 660p, making this company a no-brainer buy for me.
The post Cheap UK shares: 1 I’m buying and 3 I’m avoiding in 2022 appeared first on The Motley Fool UK.
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James Reynolds has no position in any of the shares 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.