When it comes to stock picking, I reckon it often pays to run through a checklist of requirements. My checklist is part of the process that helps me find what I believe to be some of the best UK shares to buy now.
But before I get into the process, here’s an interesting piece of information. The best investors expect to achieve consistent annual returns of between 20% and 30% from a long-term investment strategy. So says American multi-millionaire stock trader and investor Mark Minervini.
Minervini reckons many long-term investment strategies deliver returns somewhere close to the general stock market indexes. And the long-term return from shares in aggregate runs somewhere in the high single digits.
So those parameters are how I aim to judge my performance. But any consistent positive annual return can compound into a surprisingly high overall sum in the end. However, positive returns from share investments will never be guaranteed from year to year. And stock investing always features an element of risk.
The first item on my checklist is balance sheet strength. Many problems in a portfolio can stem from companies with stretched finances.
The second requirement is for an improving underlying business. So I read the most recent outlook statements and look at City analysts’ expectations for earnings growth.
Third, I search for evidence the underlying operation is a quality setup. One method is by checking the historic measures for return against assets and capital invested. And by identifying a decent operating profit margin. A further piece of the quality puzzle for me is a consistent record of trading and financial figures.
Finally, when all the other requirements have been met, I look for good value. One way is by comparing the share price against historical earnings and forward-looking predictions for earnings. And I’ll consider the price against cash flow and sometimes asset values, depending on the type of business.
3 of the best UK shares I’d buy now
Right now, that four-step process has led me to three shares that could be some of the best UK shares for me to buy now. The first is broadcaster ITV. In early May the company said, “We have made a good start to 2021 with total revenue and total viewing both up”.
I also like the look of catalysts and green technologies company Johnson Matthey. At the end of May, the company said, “The current year has started well with a continuation of the strength seen in the second half of 2020/21”.
My third pick is transport and logistics solutions specialist Wincanton. The company said in its May full-year results report, “Looking ahead, we remain confident that we are well placed to make further progress”.
Of course, it’s possible for these stocks and their underlying businesses to underperform despite my research process, and I could lose money. However, I’d be inclined to embrace the risks and hold the stocks in my diversified long-term portfolio.
Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended ITV. 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.