It’s difficult for UK investors to determine which are the best shares to buy now. The Covid-19 crisis isn’t over yet but the market has almost recovered from the crash.
Economic crisis
Many UK investors might wonder what to buy now. After all, the markets seem to have recovered and the economic crisis will end. Share prices are leading indicators, so they recover earlier than corporate earnings. But it seems to me that another stock market correction has just started. US-China relations, Brexit uncertainty, and rising coronavirus infections are just a few risks the global economy faces. Even if no other ‘black swan’ event happens, the economy will take ages to recover.
I know. It sounds grim. But we all have a chance to avoid financial losses and invest profitably. Don’t forget that all previous crises ended and the current one will end sooner or later.
Worst shares to buy now
To start with, it’s important to avoid the worst shares. What are they? In my view, they are both overvalued and have bad accounting fundamentals. Earlier I wrote about Novacyt (LSE:NCYT), a small-cap company specialising in coronavirus testing equipment. Novacyt estimates that its revenue surged by almost 1,000% in 2020 compared to 2019. That should, in theory, translate into positive earnings. But they would need to be extremely high in order to justify the 2,000% share price surge in just several months. I don’t believe that will be the case.
We should remember that Novacyt was loss-making in 2018 and 2019. I think this company’s share are anything but the best to buy. It’s not a value investment at all because they are so expensive. This year’s success seems to be a one-off. Although I think the pandemic will take some more months to contain, we cannot expect the Covid-19 crisis to last for many years if not decades. So, the demand for coronavirus equipment will eventually fall.
Best shares to buy now for UK investors
You might wonder now what are the best shares to buy now. As a value investor, I start by looking for companies with long operational histories. They should never have gone bankrupt. Think of Aston Martin and how many times it went bankrupt, and you’ll know the kind of company that I avoid.
Then, I look for a company that is large. You could just look at a company’s market capitalisation but sales revenue is a far better indicator.
Most importantly, the company should be profitable. You can judge its profitability by looking at its net profit margin. A figure above 15% is usually great. But you should also compare the company’s earnings to those of its peers, and at its earnings history. Ideally, earnings should keep rising.
Then, a strong balance sheet is vital too. How do you judge if it’s strong or not? A company should have more assets than liabilities, and a current ratio of more than 1. There are also measures like the debt ratio. A figure below 15% is considered healthy. Or, for a rough idea of financial health, you could just check the company’s credit rating. The higher it is, the healthier the company’s balance sheet.
Finally, the accounting multipliers – the price-to-earnings (P/E) and the price-to-book (P/B) ratios – should be relatively low. Look for a P/E ratio below 20 and a P/B of 1 to 3.
There are other features best shares to buy now should ideally have. But these are the most important ones.
