The London Stock Exchange is home to over 1,500 shares. But not all of these companies will go on to deliver a strong return for shareholders, and many of them aren’t ‘safe’ picks either. No stock is 100% safe, of course. But for conservative investors, finding the safest places to park and grow capital is a priority. And thanks to stock screeners, it’s possible to quickly trim more volatile stocks from consideration and uncover profitable and healthy enterprises that come with a lot more security.
Screening the UK market
Let’s start by defining the goals of this screening process. The aim is to find businesses with healthy balance sheets, low share price volatility, and robust earnings.
With that in mind, I set up the following criteria:
- A beta of less than 1.0 to find stocks that have lower volatility relative to the market.
- A price-to-earnings (P/E) ratio of less than 25 to avoid richly valued stocks that might take a tumble on an earnings miss.
- An interest coverage ratio of at least 10 to ensure there’s enough operating income to cover debt-related expenses.
- A net income growth rate of at least 10% to ensure profits are growing.
Five ‘safest’ stocks
After applying these filters, a decent-sized list of UK shares was generated. And in order of market-cap, the top five stocks turn out to be:
- Rio Tinto (LSE:RIO).
- Intertek Group.
- Cranswick.
- Bytes Technology Group.
- MONY Group.
So are these stocks no-brainer buys? Not necessarily.
Screening the London Stock Exchange is just the first step of the investment research process. And just because a business has passed these ‘safe’ criteria, that doesn’t mean buying shares is a risk-free endeavour.
To demonstrate, let’s zoom in on the top pick, Rio Tinto.
Risk versus reward
As one of the largest mining enterprises in the world, Rio Tinto certainly has the advantage of size on its side. And with over $8.8bn of cash on its balance sheet versus $13.9bn in debts along with $15.6bn in operating cash flow generation last year, the company seems to be quite healthy.
Rising global demand for copper – a critical material for electronics – along with strategic diversification into critical energy transition metals like lithium creates welcome tailwinds. That’s a handy boost to help secure future earnings growth. And with the P/E ratio at just 8.4, the stock seems to be trading at a discount relative to many of its peers.
For investors, that creates quite an enticing picture. But it’s also important to explore the threats that Rio Tinto currently faces. And one of the biggest seems to be its dependency on China.
China’s a big consumer of rare earth metals as well as construction materials like iron ore used to make steel. A slowdown in Chinese construction or electric vehicle (EV) demand could have a significant adverse impact on commodity prices, harming Rio Tinto’s profitability. After all, extracting metals from the ground incurs a lot of fixed costs.
In such a scenario, an investment into Rio Tinto may not turn out to be ‘safe’ after all. It’s a similar story with the other stocks on this list. And to avoid making ill-informed decisions, investors must spend time digging deeper to avoid falling into traps.
