The Cineworld (LSE: CINE) share price has soared over the past month as investors have rushed to buy the stock. Positive vaccine news, coupled with the improving outlook for the UK economy, has boosted investor sentiment towards depressed UK shares like Cineworld.
But I’m not convinced. I think it’s going to be some time before this company can return to 2019 levels of probability.
That doesn’t mean I’m avoiding all UK shares entirely. In fact, I’m incredibly optimistic about the outlook for UK equities in general. Although I think it’s sensible to focus on high-quality businesses and diversified funds.
Forget the Cineworld share price
On the face of it, the Cineworld share price looks cheap. Both from a fundamental perspective and compared to the stock’s trading history.
However, that doesn’t necessarily mean the stock will be an excellent addition to my portfolio. So far, Cineworld has been able to navigate the pandemic. But it’s also built up an enormous amount of debt in the process. I think this additional borrowing will prove to be a drag on profits for many years to come. Profits will go to repaying creditors rather than rewarding shareholders.
As such, I think owning the Cineworld share is a bit of a gamble. I’m not particularly interested in gambling with my money.
Many other UK shares look to be better investments, in my opinion.
Other UK shares to buy
One of the ways I’m investing in these companies is with the Mercantile Investment Trust (LSE: MRC). This trust owns a broadly diversified portfolio of high-quality small- and mid-cap stocks. Top holdings include the tabletop games company Games Workshop and homebuilder Bellway.
Investors could own these stocks individually in a portfolio, but I think there are added benefits from the portfolio diversification. In my view, the entire UK market is undervalued.
However, considering the mixed economic outlook for the UK economy, I think some businesses will perform significantly better than others in the near term. So, rather than trying to pick winners and losers, I’ve chosen to own a basket of the market’s best companies by acquiring Mercantile.
Another advantage of owning UK shares in this way is the income credentials of the trust. It currently offers a dividend yield of 3%. This is relatively secure because investment trusts can hold over a portion of their revenue every year to cover dividend payouts in times of uncertainty.
This quirk has been hugely valuable in 2020 as many companies have slashed their dividends to preserve cash in the pandemic. Indeed, the Cineworld share price plunged when the company eliminated its dividend.
Therefore, while shares in Cineworld may continue to rise, I think the company’s outlook is too uncertain. That means shareholders are unlikely to see any significant income from dividends until the creditors are paid off.
Meanwhile, Mercantile offers a 3% dividend yield and a way to own some of the UK’s top companies at the click of a button. That’s why I prefer to hold the investment trust rather than the Cineworld share price.
Rupert Hargreaves owns shares in the Mercantile Investment Trust. The Motley Fool UK has no position in any of the shares mentioned. 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.