UK shares have been struggling recently. The FTSE 100 has fallen by 5.5% over last month and the FTSE 250 is down 6.25%.
Sometimes, falling stocks can provide interesting buying opportunities for investors. Other times, it’s best to stay well away.
With UK share prices at the moment, I think there are some of each. Some shares have dropped to levels that I find attractive, others I have no interest in.
With that in mind, here is my view of the good, the bad, and the ugly of UK shares.
The good: Games Workshop
I think that Games Workshop (LSE:GAW) is a great business. The risk with this stock is recession, but I think that the company will fare better than its share price implies.
In my view, Games Workshop’s franchises matter to its customers in ways that the market is failing to appreciate. As such, I think that its customers will do everything they can to keep spending on Warhammer merchandise.
If I’m right about that, the stock should be a great buy for my portfolio. The stock has no debt and trades at a price-to-earnings (P/E) ratio of 17.
At that level, I think it’s priced for a drop in earnings. If that doesn’t come, or is less than expected, I think that my investment here could do really well.
The bad: Imperial Brands
Imperial Brands (LSE:IMB) has a dividend yield above 8%. As such, it might do well if investors continue to seek passive income. But I don’t think much of the business, so I won’t be buying the shares.
Smokers are brand loyal, which should be a positive for cigarette companies. But of the top 10 most valuable cigarette brands in 2021, Imperial Brands owns none.
Cigarette companies are also associated with high margins, but Imperial Brands hasn’t achieved operating margins above 10% during the last decade. For context, operating margins at Games Workshop are currently around 41%.
Furthermore, Imperial Brands hasn’t managed any significant revenue increases over the last 10 years. This might be because the majority of its revenue comes from Europe, where the number of smokers is declining.
Overall, I can’t see much to like about Imperial Brands. I’ll be staying away from the stock.
The ugly: easyJet
To me, easyJet (LSE:EZJ) looks downright ugly as a business. During the pandemic, the company increased its debt by 350% and its share count by 35%.
Investors hoped that a surge in travel demand would allow easyJet to pay off its debt and generate returns for shareholders. That hope, however, seems to have been extinguished.
Travel demand is indeed surging, but easyJet is unable to take advantage. At the moment, the airline is cancelling hundreds of flights due to staff shortages.
The company is also being hit by high oil prices. Jet fuel is a big cost for an airline and I think that oil prices staying above $100/barrel will weigh on easyJet’s profitability.
None of this is to say that easyJet has been badly managed. I think the situation is just extremely unfortunate for the company, but that doesn’t make it any better.
Falling oil prices might help easyJet’s business and its shares, but I think that possibility is remote. I’m avoiding the stock.
