UK shares: the good, the bad, and the ugly

Not every stock is a bargain just because it’s cheaper than it was a few months ago.

| More on:
Shot of a senior man drinking coffee and looking thoughtfully out of a window

Image source: Getty Images

Key Points

  • Games Workshop has no debt and is trading at an attractive price
  • Imperial Brands has low operating margins and has struggled to increase its revenues
  • EasyJet is struggling to take advantage of the surge in travel demand after having sustained significant losses during the pandemic

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.

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 considered so you should consider taking independent financial advice.

Stephen Wright has positions in Games Workshop. The Motley Fool UK has recommended Games Workshop and Imperial Brands. 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.

More on Investing Articles

Modern suburban family houses with car on driveway
Investing Articles

Should I snap up Taylor Wimpey shares at £1.30?

With the Taylor Wimpey share price down by almost 30% this year, should I snap up some shares while it's…

Read more »

Young female analyst working at her desk in the office
Investing Articles

How I’m finding shares to buy now – and keep for a decade

Our writer has been looking for shares to buy using an approach that looks both at long-term profit prospects and…

Read more »

Bearded man writing on notepad in front of computer
Investing Articles

What’s happening to the Petrofac (PFC) share price?

The Petrofac (LON:PFC) share price has had a seriously erratic year so far. I take a look at the latest…

Read more »

Young black woman in a wheelchair working online from home
Investing Articles

The Aviva share price is flying! Should I buy this 7% yield?

Despite recent gains, Roland Head thinks the Aviva share price could still be too cheap.

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

Here’s 1 passive income opportunity not to be missed!

This Fool details a passive income opportunity that could bolster his holdings, and the shares trading at cheap levels too.

Read more »

Young brown woman delighted with what she sees on her screen
Investing Articles

The Legal & General share price is dirt-cheap with a juicy dividend yield!

Jabran Khan takes a closer look at the Legal & General share price which looks like an opportunity to boost…

Read more »

Playful senior couple in aprons dancing and smiling while preparing healthy dinner at home
Investing Articles

If I’d invested £1,000 in this top lithium stock 5 years ago, here’s how much I’d have now!

This lithium stock has gone from strength to strength over the past year. But has it flown too high, or…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

A growth stock with a price-to-earnings ratio of just 9.7! Should I buy Yalla?

I'm generally not too keen on investing in dollar-demonated stocks at the moment. But Yalla, with its low price-to-earnings ratio,…

Read more »