It’s clear that today’s market is one for stock pickers. Those able to identify growing companies with solid fundamentals will likely outperform those buying companies that excelled during speculative periods. So which three UK shares could struggle in market uncertainty?
J D Wetherspoon
J D Wetherspoon (LSE:JDW) owns and operates 852 UK pubs. The company became profitable this year, but faces a challenging 2023 as high interest rates impact the economy.
Whether customers continue to visit will play a huge part of meeting earnings growth estimates of 30%. To calculate the fair value, it can be helpful to use the discounted cash flow calculation, establishing a suitable share price based on the present day value of current and future earnings. The current share price of 660p is 89% more than the calculated fair value of 336p.
Considering earnings growth and profit margins, the current price-to-earnings (P/E) ratio of 43 times is also far above the fair value of 25 times.
These calculations indicate that substantial growth is already priced into the shares. If the company can retain customers, an investment may be profitable. However, if customers feel the strain, and earnings start to decline, then it looks likely that these high valuations will dissuade investors.
Ceres Power (LSE:CWR) develops fuel cells in North America, Asia, and Europe. Shares in the company had a tremendous rise in 2020 as enthusiasm in speculative growth stocks spiked. However, with the company still unprofitable, the inflationary and more restrictive economy has led to a major decline in the share price.
It is possible that the shares could still be highly overvalued. The price-to-sales (P/S) ratio of 29.1 times is substantially higher than the industry average of 1.4 times. Looking at the discounted cash flow, a fair value of 41p is 685% above the current price of 326p.
There are some positive signs. Earnings growth estimates of 50% are high, the company has no debt, and the products appear to be effective. But with no profit likely in the next three years, an investment in the company is difficult to justify.
Polymetal International (LSE:POLY) mines precious metals such as gold and silver in Central Asia and Europe. The company was reliably profitable in recent years. However, it was unable to make a profit this year, as supply chains and geopolitical tensions limited the business.
More volatile than 90% of UK shares, this company is not for the faint hearted. On average, the stock moved 12% each week as investors assessed the viability of the company through geopolitical tensions.
The major concern is the uncertainty around key markets in Russia and Khazakstan. Analysts have suggested that Polymetal may re-list on the Abu Dhabi exchange as UK shares linked to Russia struggle on the London Stock Exchange.
The price-to-sales (P/S) ratio of 0.4 is lower than the industry average of 1.3, and demand for precious metals continues to grow due to the adoption of electric vehicles. However, with Polymetal struggling to convince investors of a long-term future, I will not be considering it as part of my portfolio.
All three of these UK shares have one thing in common — uncertainty. Whether this is a question of keeping up with investor expectations or retaining customers, I’m looking to invest my money elsewhere.