When I’m looking for cheap UK shares to make the most of my money, what’s my priority? I want free cash flow, and I want amazing value. I also want to buy into profitable businesses with great future prospects.
With these two British companies, I think I’ve found all of the above and more. They may not be household names. But I’ve learned that brilliant cheap UK shares come in all shapes and sizes.
These two have £100m+ market caps. So they are not tiny minnows, but they’re also not slow-moving behemoths either. I think there’s enough value, quality, and growth potential here to double my money.
A note on cheap UK shares
Buying companies that have low price to free cash flow (P/FCF) ratios is important to me as an investor. It’s a metric favoured by legendary ‘Big Short’ investor Michael Burry. A low P/FCF tells me I have spotted a business generating ample cash that’s not yet been reflected in the share price. Free cash flow is the money a company has left over each year to pay off debts and pay out to shareholders. That could be in the form of dividends, share buybacks, or improving long-term value by expanding operations.
Let’s talk about Vertu Motors (LSE:VTU). It produced revenue of £2.5bn last year, and yet has a market cap of only £171m. It also just upgraded its profit forecast to £30m for 2021 thanks to an “exceptional used car market”. Vertu operates a network of car dealerships across the country and added 30 new outlets over the past year and a half.
A forward P/E of 7 makes these extremely cheap UK shares.
Operating profit growth jumped 92% in the last 12 months. The shares are up about 50% in that time, but I think there’s a lot further to go. Earnings are expected to jump another 24% next year and Vertu shares are slated for a tidy 3.3% dividend yield. P/FCF is just 2.9.
Covid-19 remains a risk, and the global shortage of semiconductors could hurt new car production.
Gem Diamonds (LSE: GEMD) produced operating profit growth of 42% in the last 12 months from its African diamond mining operations. That’s impressive enough. But revenues are also expected to jump from $190m to $220m by the end of this year. And dividends have returned after four years of nothing from 2016 to 2019. So I know these cheap UK shares are generating plenty of cash to hand back to shareholders. P/FCF is only 3.
Shares have lifted 155% in the last year, from 28p to 77p. But that doesn’t mean all the growth potential is already gone. The shares are trading on a P/E ratio of just 7, making them super cheap UK shares today. And Gem has been lucky.
In May 2021 it announced it found two huge white diamonds: one 254 carats and the other 370 carats, from its Letseng mine in Lesotho. It’s considered to be the highest-carat diamond mine in the world.
15 years ago the GEMD share price was 93% higher than today. The 2008 financial crisis saw diamond prices crash, and Gem’s share price with it. Demand for diamonds falls in economically shaky times. But now prices are rising. And the outlook appears much better for these luxury goods.
Tom Rodgers has no current position in the shares mentioned. The Motley Fool UK has recommended Vertu Motors. 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.