Could UK shares experience a so-called Santa rally this year? If only anyone knew. But the phenomenon of stocks doing well at the end of the year does occur more years than not.
So as we reach deeper into autumn (and the rain becomes even more frequent), which UK shares do I think could be strong candidates for finishing the year much higher? Here are two that have good prospects and that I might buy.
Primed for a rally?
Scotland-based packaging manufacturer and distributor MacFarlane (LSE: MACF), although facing some (hopefully) short-term challenges, looks to me to be a good long-term investment.
Consistent revenue growth, alongside a return on capital employed of 15%, shows to me that this packaging company does what it does well.
The fact the shares have just dropped from all-time highs potentially creates an opportunity to buy the shares before any Santa rally.
That said, as a distributor, MacFarlane is likely to be hit by the lorry driver shortage. If it can pass on these costs then it’s not a problem. If it can’t margins will be hit. Although one saving grace is that all its competitors are likely to be in the same boat. Cost pressures are a whole industry problem, not one specific to MacFarlane so I feel it shouldn’t be disproportionately affected.
I’ll consider adding the shares to my investment portfolio.
A riskier UK share
Iron ore miner Ferrexpo (LSE: FXPO) seems to me a riskier proposition. On the one hand, the shares are very cheap if I look only at the numbers. The P/E is three, the price to book value is 1.33 and enterprise-value-to-EBITDA ratio is 1.61. All of these numbers (the lower the better) suggest to me that the shares are very good value.
The shares could do well if the Chinese economy grows strongly and the immediate crisis over Evergrande’s debts, which threaten the Chinese property sector, blow over.
However, if demand for steel (for which iron ore is key) fades, then the Ferrexpo share price could tank. The fact that its shares are already cheap won’t, in the short term at least, affect investors’ perceptions that it’s worth avoiding iron ore miners. Even cheap shares can still fall further. Ferrexpo has a challenge in that it’s not a diversified miner like a BHP. Its fortunes are very tied to the global demand for and price of iron ore.
At the moment I won’t add to my holding in Ferrexpo. That doesn’t mean that there isn’t the potential in the right circumstances for this UK share to grow massively. As a shareholder, I’m keeping my fingers crossed.
I’m hoping for a Santa rally this year. If it does come, then I think MacFarlane because of its quality and Ferrexpo because it’s cheap, could both be positioned to do well.
