2 cheap UK shares that fit Warren Buffett’s investment style

Applying Warren Buffett’s investing principles to the UK market can help uncover new opportunities. I think these two cheap UK shares look promising.

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Warren Buffett at a Berkshire Hathaway AGM

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Warren Buffett can thank rigid adherence to a solid set of his own investing rules for his consistent performance over the last 60 years. The legendary investor has avoided focusing on short-term volatile swings. He instead bought market-leading and fundamentally strong companies that provide both stability and long-term opportunity. These two UK-listed shares have both these attributes and I’d buy them today.

Boring but beautiful?

Somero Enterprises (LSE:SOM) is a share I already hold. It’s certainly not an exciting new tech start-up. It doesn’t have lofty ambitions to disrupt industries and change the world. The company specialises in a very niche business producing concrete levelling equipment for the construction industry. While this may not get anyone’s heart racing, Buffett would acknowledge that the company sticks at what it knows and avoids the volatility of more stimulating sectors.

In its recent annual report, it revealed a 51% increase in revenues alongside an 85% increase in net income. The company has streamlined business operations and increased net income at a greater rate than revenue, which is good news. However, 2020’s poor year most likely influenced some of this data.

Somero also had record cash at the end of 2021 and no long-term debt. This gives it liquidity and mobility to seize new investment opportunities and continue to grow over the next few years. I feel the company’s recent share buyback campaign would also be of interest to Warren Buffett who has applauded the use of share buybacks in the past.

While the business is subject to inflation-linked and future growth uncertainty, I still believe it has many of the attributes that Buffett looks for in an investment. Its 7.2% dividend yield makes me even more confident about this cheap UK listed share.

A construction company with strong foundations

Morgan Sindall (LSE:MGNS) is a leading construction and regeneration company. It operates within the national infrastructure, housing and urban regeneration sectors. And it has the strong financial fundamentals that Buffett looks for with cash of £460m comfortably exceeding debt of £110m.

Once again, Morgan Sindall is unlikely to deliver stunning returns year after year and shake up the construction industry. But it isn’t promising to. What the stock does offer is a fair return on equity of 20%, a strong balance sheet and a competent management team that has investors’ needs as a priority.

The stock is currently trading at a price-to-earnings (P/E) ratio of 11.3 and offers a 4% dividend yield, which suggests relatively good value. The business has also seen strong growth in the regeneration and housing sectors. This is expected to grow as the UK government pushes to build more houses and tackle the undersupply of housing.

Morgan Sindall does have exposure to inflationary risks. There’s an expected increase in the price of materials and lower future construction demand to deal with. However, it has adequate cash to deal with future risks.

Nobody can truly predict what Warren Buffett would invest in. However, these two stocks hold many of the same attributes as his previous successful investments. I’m considering adding to my Somero holding and opening a new position in Morgan Sindall to try and emulate Buffett’s incredible performance.

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.

Finlay Blair owns shares in Somero Enterprises, Inc. The Motley Fool UK has recommended Somero Enterprises, Inc. 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.

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