The market rally we’ve seen since November has left some UK shares trading at share prices last seen before the pandemic. I’m finding it harder to find cheap shares to buy than I was six months ago.
However, I reckon there are still some good opportunities out there. Today, I’m going to look at two companies that have caught my eye recently.
From oil to renewables
I think it’s fair to say renewable energy is a sector that’s going grow for the foreseeable future. But the reality is that much of our energy today still comes from oil and gas.
I reckon that one good way to play the energy transition is to invest in companies whose services are needed by oil producers and renewable operators, especially offshore. My favourite stock in this sector is Wood Group (LSE: WG), which has been in business for more than 100 years.
Wood Group has historically focused on the oil sector, but the company has diversified in recent years and now works in renewables and the wider infrastructure sector. I reckon that should support longer-term growth.
In the meantime, the company is still an important service provider to the oil sector — including the growing area of North Sea decommissioning.
What could go wrong? Market conditions are pretty tough for oil services firms these days. Wood’s profit margins have never returned to the peak levels seen from 2013-2015, when oil traded at over $100 per barrel.
The company is also still battling to repay the debt it built up when it acquired AMEC Foster Wheeler in 2017. Borrowings are coming down, but they’re still a little high for my liking.
Despite these concerns, I think Wood Group looks decent value at the moment, on around 13 times 2022 forecast earnings. I’d be happy to buy the shares at this level, as I expect to see steady growth over the next few years.
This UK share could keep growing
One company that’s impressed me over many years is FTSE 250 firm Spirent Communications (LSE: SPT). This company is one of the leading players in the network-testing and analytics sector. Its main business is providing the services and equipment needed by network operators to test services such as 5G and Wi-Fi.
The pandemic caused some extra challenges last year. Despite these, Spirent’s adjusted pre-tax profit rose by 10% to $104m last year, while its operating margin rose to 18%.
City analysts are forecasting a 17% increase in pre-tax profit for 2021. Is this the perfect business? Not quite.
Spirent must continually invest in research and development to ensure that it has the best testing solutions for new technology. The company is spending about 20% of its revenue on R&D each year at the moment and must continue to stay ahead of new trends. Falling behind could result in a multi-year slump in new sales.
This UK share isn’t cheap either. Spirent trades on around 23 times forecast earnings for 2021, with a dividend yield of just 1.6%. If steady growth continues, then I think this valuation is probably fair. But if results disappoint, then I think the stock could fall sharply.
Despite these risks, I’d buy Spirent Communications today. I reckon it’s a good quality business in a growing market. In my experience, that combination often makes for a good investment.
