17% of my Stocks and Shares ISA is invested in these 2 UK shares

Stephen Wright looks to focus on investments in companies that have strong competitive advantages. And two UK shares stand out to him.

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Even with the FTSE 100 close to its highest-ever levels, I think UK shares look like great value at the moment. And there are a couple that make up a big part of my portfolio.

Neither is involved in hot topic artificial intelligence. But they both have what I look for in stocks to buy – a durable business with something that sets it apart from its competitors.

Games Workshop

Nobody else does what Games Workshop (LSE:GAW) does. It owns the Warhammer franchise and that makes it impossible for other games companies to replicate its products.

The biggest risk is high interest rates causing customers to spend less. That’s a danger right now, but the business has some great economics that should help in the long term.

Games Workshop generates £181m in operating income annually using £138m in inventory and fixed assets. This means the company doesn’t need most of the cash it generates to maintain its operations. 

As a result, it’s able to return most of that cash – around £139m – to shareholders in the form of dividends. And that’s while growing revenues at an average of 13% per year.

JD Wetherspoon

At first sight, JD Wetherspoon (LSE:JDW) doesn’t look as attractive. But having the lowest prices in the UK pub industry puts it in a terrific position.

Importantly, the company also has the lowest costs. There are some things it can’t control – notably energy and staffing costs – and these constitute a risk for investors to be aware of.

The company benefits enormously from economies of scale though. On top of this, owning the majority of its estate outright reduces the amount it has to pay out in lease obligations.

This puts it in a much stronger position than its competitors. And a differentiated business in an important sector is exactly the kind of stock I want to own in my portfolio. 

Diversification

Having 17% of my ISA committed to two UK shares looks like I’m not interested in building a diversified portfolio. But it’s not as straightforward as this.

One point is that diversification isn’t just about owning more stocks. A portfolio with five US tech companies is less diversified than one with three stocks from different sectors and regions.

This is relevant to the UK stocks I own. Games Workshop generates most of its revenue in the US, which limits the effect of a stagnating UK economy on my investments as a whole. 

A portfolio might therefore be more diversified than it looks. Two UK businesses focused on discretionary consumer spending might have quite different risk profiles.

Portfolio-building

My Stocks and Shares ISA is only part of my overall investment portfolio. But a significant amount of it is dedicated to UK shares, especially Games Workshop and JD Wetherspoon.

While I’m looking to own companies in different industries and geographies, my main focus is on quality. That’s why I’m invested relatively heavily in these two UK stocks.

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.

Stephen Wright has positions in Games Workshop Group Plc and J D Wetherspoon Plc. The Motley Fool UK has recommended Games Workshop Group Plc. 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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