The valuations of many UK shares continue to look highly attractive to me. I think there are blue-chip bargains in the flagship FTSE 100 index, but also cheap shares among smaller companies.
If I had a spare £5,000 to invest today, I would spread it evenly across a handful of firms.
Legal & General
Financial services powerhouse Legal & General has a lot going for it. The company benefits from a vast target market, strong brand and extensive customer base.
As an investor, it also has attractions. They include a yield of 8.5% and price-to-earnings (P/E) ratio of around 6.
That makes Legal & General look like a cheap share. So what might be the risks? One that concerns me is a weakening economy affecting investment returns, leading investors to withdraw funds and the company’s profits to shrink.
Big Yellow
Even if the economy weakens, I expect demand for self-storage to remain high. Customers often rent a unit and renew it for years on end.
The UK market has lots of space to grow, based on the experience of the far bigger US market.
The market leader is Big Yellow. Its shares are only 10% costlier than five years ago, even though revenues have grown 62% in that period.
Perhaps that valuation reflects a steep profit fall last year. I think a dominant position in a fast-growing, proven industry makes Big Yellow an attractive investment idea however.
British American Tobacco
The past five years have been bad for the British American Tobacco share price. It has fallen 38% in that period, meaning these cheap shares trade on a P/E ratio of under 7. I see that as a bargain for this 9%-yielding free cash flow machine.
The risk of declining cigarette use hurting sales and profits is real. But I think that risk is fully reflected in a share price, currently close to 52-week lows.
Hollywood Bowl
The leisure group Hollywood Bowl has a proven business model running bowling lanes and is growing its mini-golf business too. That gives it a lot of growth opportunity.
Last year saw record revenues. The business is highly profitable, with post-tax profit margins last year coming in at 19%. Tightening consumer spending could hurt revenues and profits. But I think a P/E ratio of 10 makes these cheap shares a bargain.
D S Smith
The last of the cheap shares on my list is packaging producer D S Smith. It trades on a P/E ratio of slightly over 8 and yields 6%. I think that undervalues the long-term prospects for the industry and D S Smith’s position within it.
Last year saw revenues grow 14% and post-tax profits were up 76% to almost half a billion pounds. Yet the market capitalisation is around £4.2bn, meaning these shares look cheap to me.
Cost inflation could hurt profit margins. But as a long-term investor I expect robust demand for packaging products and think this business should benefit from that.
