Defining what’s a good value UK share isn’t an exact science. It’s clearly subjective, since every investor will have their own viewpoints on what constitutes an undervalued buying opportunity.
However, a good value investment is likely to combine two major elements. Price and quality. Through focusing on achieving both of these attributes, it may be possible to focus on the most attractive buying opportunities.
Over time, they may provide a greater chance of delivering capital growth in a potential long-term stock market recovery.
Attributes that make good value UK shares
While it can be tempting to simply buy the highest-quality shares, or the cheapest stocks, combining the two elements may provide a greater opportunity to generate capital growth. Buying good value UK shares has been a relatively successful strategy for some investors in the past. This has involved purchasing a strong company at a price that doesn’t reflect its long-term financial prospects.
Clearly, assessing the quality of a company is very subjective. For example, it may include financial strength, a unique product, access to a diverse range of markets, or a solid management team that has a long track record of success.
Similarly, different measures can be used to determine whether a stock is cheap. They include, but are not limited to, earnings multiples and comparing asset values to current share prices.
By focusing on good value UK shares, rather than exclusively on cheap or high-quality stocks, it may be possible to reduce risk and improve overall returns. This could lead to a stronger portfolio performance in a potential long-term stock market recovery.
Identifying the best buying opportunities today
Of course, many good value UK shares continue to face difficult outlooks. A stock market rally over the coming years is by no means guaranteed. Risks such as coronavirus and political uncertainty could weigh on the stock market’s performance over the short run, as well as in the long term.
However, the FTSE 100 and FTSE 250 both currently trade below their all-time highs. This suggests there may be a number of companies that trade at lower prices and on lower valuations than they have averaged in the past.
Similarly, some companies may be struggling in the short run to deliver sales growth. But these also have the financial means to survive a period of difficulty to benefit from a potential global economic recovery.
Through buying such companies now and holding them over the long run, it may be possible to obtain a relatively high return. As such, now could be the right time to focus on buying good value UK shares. Certainly while the stock market continues to trade at a relatively low level. And while investor sentiment towards some industries is somewhat weaker than has been the case in previous years.
