UK shares

I’m primarily looking for shares to buy that could benefit from a UK economic recovery over the next few years. 

The property industry is one of the sectors that’s seen the most growth over the past 18 months and may continue to register strong growth. That’s why I’d acquire LSL Property Services (LSE: LSL). 

This property services group is active in all sections of the industry. It provides valuation services for mortgage providers, mortgage broking, and estate agency services. Thanks to this diversification across the industry, growth has rocketed over the past year. For the six months to the end of June, revenue increased 45%, while group operating profit increased 647% to £26.7m. 

The property market’s experienced a boom over the past year, thanks in part to the government stamp duty holiday. It seems unlikely that property prices will continue to increase at a double-digit annual percentage rate. Still, even if growth returns to normal levels, I reckon LSL will continue to reap the benefits. 

This is why the company features on my list of the best UK shares to buy now. It also has a strong balance sheet with £17m of net cash and is distributing profits to investors. The stock currently yields just under 1%, although I wouldn’t rule out further cash returns if profits continue to grow. 

Challenges that could hold back group growth include higher interest rates, which could hurt property market transactions. A lack of qualified staff may also contribute to a growth slowdown.

Growth shares to buy

Another company that features on my list of the best UK shares to buy is Virgin Money (LSE: VMUK). I’d buy this stock because I want to have some exposure to the financial sector over the next few years.

I think this sector will benefit more than most in the UK economic recovery, as it looks as if interest rates increase next year. That could be positive for bank margins. 

Virgin’s better positioned than other lenders, in my opinion, because the group has already made substantial progress with its digital strategy. It’s planning further changes over the next year. These include more branch closures, greater automation and a hybrid working model.

While these changes will incur substantial restructuring costs, they should lower overall operating costs and improve group flexibility when complete. The combination of organic growth and a streamlined operating model should act as a dual tailwind for Virgin Money. 

Challenges it could face as we advance include higher costs and additional regulation, both of which could hold back the group’s growth rate. 

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Here are three companies in three different sectors I would buy with £3k today. 

Recovery shares to buy

The first company is the construction group Balfour Beatty (LSE: BBY). This might not be suitable for all investors. Indeed, construction businesses can be risky to own because profit margins in the industry are razor-thin. As such, these corporations can struggle to pass on rising costs to customers, which can impede profit growth. 

Still, I think this company is one of the best shares to buy for its exposure to the UK construction sector. The industry is already reporting strong growth. Moreover, the government’s infrastructure spending plans should only drive growth higher in the medium term. 

As one of the largest construction businesses in the country, Balfour should be able to capitalise on this trend over the next few years. Its size should also help it navigate any headwinds at the same time. That’s why I would buy the stock for my recovery portfolio today. 

Property sector

In the property sector, I would acquire LSL Property (LSE: LSL). The property industry is one of the largest sectors of the UK economy, and LSL is one of the few genuinely diversified property businesses listed in London.

The company owns estate agent brands, provides financial services, and works as a surveyor for some of the largest mortgage providers in the country. The group is a one-stop-shop for property in the UK.

That’s why I think this is one of the best shares to buy today and would require it for my recovery portfolio. I feel that no matter what happens over the next few years, LSL’s diversified portfolio will help the business navigate any environment. 

That does not mean the enterprise is without its risks and challenges. For example, the property market could come under pressure if interest rates suddenly increase. That would curb demand for the group’s services, weighing on profitability and the stock price. 

Travel and tourism

The last company I would acquire for my recovery portfolio is SSP Group (LSE: SSPG). I think it’s fair to say this enterprise, which owns a portfolio of food and beverage outlets in travel locations worldwide, has had its business model decimated by the pandemic. Revenues for the six months ended 31 March 2021 declined 79% on a like-for-like basis. 

Considering the challenges facing the enterprise, it’s certainly not for the faint-hearted. Not only have SSP’s revenues collapsed over the past year, but it has also built up an enormous debt mountain. At the end of March, net debt, including lease liabilities, was £2bn. In comparison, revenue for the six month period was £257m. 

Management doesn’t expect revenues to return to pre-Covid-19 levels until 2024. That implies SSP is set for several years of uncertainty. So the risks of investing here are clear. Nevertheless, I would buy the stock for my portfolio because I believe it has excellent recovery potential. I think the company can outperform expectations as the global economy reopens, which could make it one of the best shares to buy today. 

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UK shares to buy

The first company is the London Stock Exchange (LSE: LSE).

The owner of the UK’s primary equity market and other financial businesses, this company essentially owns the plumbing of the UK financial system. I think this gives it a unique competitive advantage. As long as the country’s financial system continues to function, I reckon the LSE should continue to grow. 

That being said, there have been periods in the past when the group has struggled. These include the financial crisis. The enterprise also has a lot of debt and has borrowed more to fund the acquisition of information provider Refinitiv. This elevated level of borrowing could be a significant risk for the group. 

Still, I would buy this company for my portfolio UK shares today, considering its competitive advantages and position in the UK economy. 

Property market 

Another company I would buy is LSL Property Services (LSE: LSL). 

This operation owns a range of businesses covering everything from the buy-to-let market to estate agents and mortgage surveyors. It conducts mortgage valuations for some of the largest mortgage lenders in the country. 

While this does mean LSL’s fortunes are tied to those of the UK property market, I think its diversification gives the group an edge. For example, despite a 14% decline in revenues last year and one of the worst economic depressions in UK history, LSL still reported net income of £16.3m. 

Of course, there’s no guarantee the company’s diversification will make it immune from any housing market stress. A sudden increase in interest rates could cause substantial stress in the property market. This may have a significant negative impact on the group as every part of the market may suffer. 

Even after taking this risk into account, I would still add LSL to my portfolio of UK shares today for its growth potential. 

Insurance income

The final company I would buy is Lancashire Holdings (LSE: LRE). The Lloyd’s of London insurer is benefiting this year from a substantial increase in insurance rates. In some segments of the market, rates have risen by more than 10%. This implies insurers such as Lancashire are on track for a strong performance this year.

However, they are still counting the cost of the pandemic, the final cost of which is not yet known. It could be substantially more than current predictions, which means the sector may have to put aside more money than expected.

This is probably the most considerable risk Lancashire faces right now.

I believe rising rates should go some way to mitigating the risk outlined above. That’s why I would buy the stock for my portfolio of UK shares, even though there could be a significant negative surprise on the horizon. 

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As such, I would invest £1,000 in businesses like these today. There are a couple of companies, in particular, that I’d buy straight away. 

UK shares on offer

Small-cap growth stocks aren’t suitable for all investors. These investments are highly volatile and can be riskier than blue-chip stocks. Smaller businesses tend to have fewer resources, which means they’re more susceptible to employee mistakes and competition. 

Still, when these companies get everything right, they can be great investments.

On that note, I would deploy part of my £1,000 investment in Pendragon (LSE: PDG). This car sales and service company has been hit hard by the pandemic.

However, with some analysts predicting a strong rebound in consumer spending over the next few months, I think the business could achieve significant sales growth. There’s also scope for an increase in service sales as drivers get back on the road.

Of course, this isn’t guaranteed. Pendragon could end up nursing significant losses if consumers don’t return to its showrooms. A weak balance sheet may accentuate its problems. 

Nevertheless, I think this is one of the best UK shares to buy now to profit from the economic recovery.

Property market

Another opportunity is LSL Property Services (LSE: LSL). The UK property market is booming, and this company provides a one-stop-shop for home buyers and sellers. It also offers rental property management and financing services. I think this portfolio of products will help the group capitalise on the growth of the property market. 

There are also plenty of opportunities for the company to expand into new business lines. Acquisitions could be another route for growth. 

Like all investments, this company is exposed to multiple risks and challenges. The property market in the UK is highly competitive and subject to wild swings. A sudden downturn in transaction activity could cause losses. If it suffers reputational damage, it could also lose customers. 

Despite these risks, I would buy the stock for my portfolio of UK shares today. 

Death and taxes

As the saying goes, there are only two certainties in life — death and taxes. With that in mind, I think funeral services provider Dignity (LSE: DTY) could be a good company in which to place some of my £1,000 investment. 

Over the past few years, the company has had to deal with some serious issues. It has been accused of overcharging customers and anti-competitive practices.

Management now seems to be getting a handle on these problems. Once they’re dealt with, I think this company could be a tremendous long-term growth investment. There’s also plenty of opportunity for further acquisitions as the funeral services industry remains highly fragmented.

That said, the challenges that have plagued the company in the past could come back to trouble it in the future. It still has a fair bit of debt, and recent accusations may have damaged its reputation enough to put smaller operators off from selling to the larger group. 

These risks and challenges aside, I think this is one of the best UK shares to buy now for long-term growth. 

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Research also shows that buying and holding stocks can produce better returns in the long term, although this isn’t guaranteed. This strategy might not suit all investors. 

Still, I’m comfortable with the level of risk involved with this kind of strategy. With that in mind, here are two dirt-cheap shares I’d buy with the view to holding them for the next decade.  

Dirt-cheap shares 

Recruitment consultancy Robert Walters (LSE: RWA) has reported a substantial decline in the demand for its services over the past year. As a result, investor sentiment towards the business has plunged. 

However, I’m willing to look past these short-term headwinds. I think there’ll always be a need for the recruitment services Robert Walters provides. And while the firm might have seen a drop off in demand over the past 12 months, I think this demand will return as the economy recovers. 

That’s why I’d buy the stock as part of a portfolio of dirt-cheap shares today. That said, this business isn’t without its risks. Recruitment is a highly cyclical business, as we’ve seen over the past 12 months. The company’s size will help it weather periods of uncertainty, but any reputational damage could destabilise the business.

As such, while I’d buy the stock to hold for the next decade, I plan to keep an eye on these challenges.

Property market growth

The UK property market is hugely important to the country’s economy. The market is highly cyclical, but some sections are more stable than others.

That’s why I’d buy LSL Property Services (LSE: LSL) as part of a portfolio of dirt-cheap shares today. This company provides a range of services for the property sector, including residential sales, lettings, surveying, conveyancing and advice on mortgages and non-investment insurance products.

I think this could be one of the best ways to invest in the property sector, aside from buying a property directly.

After recent declines, shares in LSL are trading at a P/E of 9.7, based on City estimates for 2020. That’s compared to the market average of 16. Of course, these are just estimates at present, and there’s no guarantee the company will hit these targets. That’s one of the risks of investing here.

The corporation may also suffer if the UK property market takes a turn for the worst. Its diversification may help the business with uncertainty, but a sudden slump in house prices would almost certainly impact the company. 

I plan to keep an eye on these risks over the next few years. But despite the challenges the group faces, I’m incredibly optimistic about its long-term potential. That’s why I’d add the stock to my portfolio of dirt-cheap shares today.

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Unfortunately, I think the shares may continue to fall. As I’ll explain, even at current levels the group’s valuation looks too high to me.

What’s gone wrong?

Purplebricks now expects revenue for the current year to be between £130m-£140m, about 20% lower than previous guidance of £165m-£175m. The company blames “challenging” conditions in the UK and Australia and an unsuccessful marketing campaign in the US for this shortfall.

I suspect problems may run deeper. The company warns that UK sales growth is likely to slow to 15-20% this year, compared to 80% last year. Are sellers finding better deals elsewhere?

In the US, the firm says it has recently moved to a pay-on-completion business model. This sounds to me like a standard no-sale, no-fee arrangement. I’d expect this to result in slower revenue growth.

A final concern is that the firm is losing two key managers at the same time. The chief executives of the UK and US businesses will both leave shortly, having been with the outfit for just two years.

I won’t be investing

Neil Woodford’s funds own 27% of Purplebricks, making him the group’s biggest shareholder. His shareholding is probably too big to sell without destroying the share price, so I guess he’ll have to remain patient and hope things improve.

This business could succeed — I’m sure there’s space for online-based estate agents in the market. But as I’ve commented before, despite its online model, the company still has an extensive network of agents. So it doesn’t have the low-cost structure and scalability of a true online business.

Another concern is the amount of money being spent on overseas expansion. If management had focused its efforts on building a profitable and successful business in the UK, I might be more interested. But the firm is spending millions on loss-making efforts to break into Australia, Canada and the US. That seems too ambitious to me.

Analysts expect a loss of 12.9p per share this year, or about £40m. A further loss is expected next year. Even after today’s fall, this loss-making company is still valued at about three times its sales. That looks much too expensive to me.

An agent I’d buy

LSL Property Services (LSE: LSL) lacks the catchy name and trendy advertising of Purplebricks. But this group, whose businesses include estate agents Reeds Rains, Your Move and Marsh & Parsons, looks much more appealing to me.

Last year, LSL reported revenue of £312m and an underlying operating profit of £37.5m. A similar result is expected for 2018. Despite these favourable figures, the group’s market capitalisation is just £254m. That’s roughly 30% below Purplebricks.

In my view, LSL’s 11% operating margin and strong cash generation make it of much more interest than Purplebricks. I’d also note that this smaller firm has a sizeable lettings business and this should help support earnings even if the housing market slows.

LSL shares currently trade on a 2018 forecast price/earnings ratio of 9.7 and offer a 4.1% dividend yield. This payout should be covered 2.5 times by earning, suggesting that it’s quite safe. I’d rate LSL as a possible buy.

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Today, I’m going to outline why I believe these two stocks deserve a place in your portfolio. 

Explosive growth 

When it comes to earnings growth, Treatt is in a world of its own. Over the past five years, the ingredients manufacturer to the flavour, fragrance and consumer goods markets has reported earnings per share (EPS) growth of 21% per annum. Net profit has grown from £3.1m to £9.6m for 2017. 

And today the company announced yet another positive performance for the year ended 30 September. Adjusted operating profit for the period grew 8.1% year-on-year to £12.6m, and adjusted EPS jumped 9.8%, or by 14.1% on a constant currency basis. 

What’s more, according to management, the company has already made a strong start to the new financial year. CEO Daemmon Reeve said the firm has “had a steady start to the new financial year” and sees a “number of attractive opportunities in our pipeline of projects with both existing and new customers.” Treatt’s CEO goes on to confirm that the business is trading in line with current market expectations for the full year. 

While the company’s current financial year has only just started, considering its track record of growth I’m confident that the business can hit analyst targets for the next fiscal year. Current figures suggest the group will report EPS growth of around 4% for next year. Even though the stock might look expensive, trading at a forward P/E of 24.6, I reckon this is a price worth paying for such an impressive track record of earnings growth. 

Income champion 

LSL’s growth track record isn’t as impressive as Treatt’s, but when it comes to income, this property services business is by far the better buy. Right now, the stock supports a dividend yield of 4.2%, and the payout is covered 2.5 times by EPS. 

There’s been some concern recently that LSL will have to reduce its distribution due to the cooling housing market. But a trading update issued by the company today seems to alleviate these concerns.

Unlike other property-focused businesses, which are struggling with declining numbers of transactions and falling home prices, LSL’s diversified business model helped the company grow revenues for the 10 months ended 31 October by 3.7%. Unfortunately, net debt has increased marginally over the year as the group has splashed out on acquisitions to expand its presence in the market for property financial services. However, I think the diversification seems sensible, considering the uncertain outlook for housing in the UK over the next few years. 

As well as the market-beating dividend yield, shares in LSL also look relatively cheap, changing hands for just 9.4 times forward earnings. In my mind, when coupled with the attractive income distribution, I think this is a price worth paying for a well-diversified property business.

The post Have £5,000 to invest? Two income and growth stocks I’d add to my portfolio appeared first on The Motley Fool UK.

Built for all markets 

LSL’s diversified business model has helped the company ride out the peaks and troughs of the property market. Indeed, today the firm announced that revenue for the year to December 2017 expanded 1% year-on-year and underlying operating profit rose 8% thanks to “strong growth” in financial services income of 16%, “continued growth of recurring income” with lettings up 4% year-on-year and profit growth of 8% at the surveying division.

However, despite the steady growth at these divisions, residential sales exchange income declined 9%, and the estate agency division only reported total revenue growth of 2% for the period. The company owns a total of 12 estate agency brands including Your Move, which is the largest UK single brand estate agent measured by the number of branches. 

Still, while there are weak points in the results, overall, the group is growing against a backdrop of “subdued market conditions.“

Following these figures, management has decided to increase the firm’s dividend payout to investors for the year to 11.3p per share, up from last year’s 10.3p. This is “at the upper end” the board’s policy to return 30% to 40% of group underlying operating profit before interest and tax and gives a dividend yield of 4.2% at current prices. 

And as well as this attractive dividend yield, shares in LSL trade at a deeply discounted valuation of 8.3 times 2017 earnings based on today’s reported basic earnings per share figure of 32.6. Using the adjusted figure, the shares are trading at a 2017 multiple of 9.6 rising to 10.3 for 2018, based on current City numbers. 

So overall, if you’re after a market-beating dividend yield, from a well-diversified, cheap property business, LSL looks to me to be a good pick. 

Cash-rich dividend stock 

Another dirt-cheap income stock I like the look of is recruiter Harvey Nash Group (LSE: HVN). 

Shares in this company currently trade at a forward P/E of 8.2, which looks too cheap to pass up. That said, as my Foolish colleague Roland Head pointed out at the beginning of this year, investors are concerned about Harvey’s outlook with Brexit on the horizon as 40% of the firm’s income comes from the UK and Ireland. First-half earnings did little to offset these concerns as, although revenue rose by 9.2% to £425m, excluding exchange rate effects, underlying pre-tax profit was only 1.8% higher. 

Nonetheless, as an income play, there’s plenty to like about this business. At the time of writing the stock supports a dividend yield of 5.2% and the payout is covered 2.5 times by earnings per share, so there’s plenty of headroom for further growth, or flexibility if earnings start to fall. 

On a cash flow basis, the distribution also looks secure. Last year, the dividend cost Harvey £2.9m, which was just 20% of free cash flow from operations (£14m). Put simply, it looks as if the dividend is here to stay. 

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Being neglected by the City sometimes creates attractive buying opportunities for value investors. I believe that could be the case with these two companies.

Profits up 11%

The Mission Marketing Group (LSE: TMMG) is a specialist marketing and advertising firm which operates 15 agencies. According to today’s interim results, recent client wins include Neff, Mars, Revlon and Universal Studios.

This operating progress appears to have driven a solid financial performance. Although revenue fell by 4% to £71.2m during the period, this includes pass-through costs such as television advertising. Operating income, which excludes such costs, rose by 4% to £33.8m, while headline pre-tax profit rose by 11% to £2.9m.

Cash flow from operating activities rose by 20% to £5.8m, compared to the same period last year. This enabled the firm to reduce its net bank debt by £2.1m during the period, despite settling £3.5m of acquisition liabilities.

What’s the outlook?

Last year’s performance was heavily weighted to the second half of the year, when almost two-thirds of profits were generated. Management guidance in today’s results is for a similar performance this year.

On that basis, I estimate that the group’s half-year adjusted earnings of 2.58p per share should translate into full-year earnings of about 7.5p per share. That’s slightly ahead of broker forecasts and puts the stock on a forecast P/E of just 6.1. A forecast dividend payout of 1.6p per share should give a yield of 3.6%.

Although this type of business could be hit hard by an economic downturn, these shares look good value to me at current levels and could be worth a closer look.

An overlooked property play

Property-related stocks were hammered by the sell-off that followed the EU referendum last year. But much of this doom and gloom has proved unecessary, at least so far.

The good news for investors is that some quality small-caps are still available at very affordable prices. One example is LSL Property Services (LSE: LSL), which operates a surveying business and several estate agencies.

Like most estate agency businesses, these serve both the selling and letting markets. So even in areas where house sales are slowing, letting demand should help to support profits.

Although revenue was unchanged at £151.5m during the first half of the year, LSL’s underlying operating profit rose by 37% to £15.5m during the period. This suggests that the cost-cutting and restructuring measures taken last year have paid off.

One area where the company is investing for growth is online. LSL recently acquired a 17.3% stake in internet estate agency Yopa. The plan is to provide some services to Yopa and potentially to make more online services available in LSL’s estate agency business.

This year’s surge in profits isn’t likely to be repeated next year. But earnings are still expected to climb by around 6% in 2018.

In the meantime, the group’s shares trade on an undemanding forecast P/E of 9.3, with a prospective dividend yield of 4.3%. In my view, this could be one of the better value buys in the property sector.

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The company is growing its business both organically and through bolt-on acquisitions. According to figures released today, for the six months to 30 June, 2017 revenue grew 36.1% year-on-year to £100.7m. Adjusted earnings per share expanded 5.8% thanks to “ongoing programme of investing in the group to expand our service offering for our clients globally and to deliver long-term growth in profits for shareholders.”

Management outlined four key strategic initiatives at the end of 2016, to help drive growth and the pursuit of these objectives has pushed costs higher, but shareholders should benefit over the long run. 

For the full-year, City analysts are expecting Charles Taylor to report earnings per share of 19.9p, down 11% year-on-year as the company continues to allocate capital to growth. However, in 2018 earnings expansion of 6% is pencilled in, taking earnings to 21.2p per share, giving a P/E of 12.3.  

Conservative dividends 

Charles Taylor operates a conservative dividend policy. For the past five years, payout cover has averaged two times, and management has not been afraid to cut the dividend in lean years to make sure the business does not overstretch itself. 

Going forward, the group is expected to pay out 11p per share to investors this year, and 11.6p for 2018. Both payouts will be covered at least twice by earnings per share. At the time of writing, shares in Charles Taylor support a dividend yield of 4.5%, rising to an estimated 4.7% by 2018. Continued investment in growth should underpin steady payout growth for the foreseeable future. 

Undervalued dividend

Concerns about the state of the UK property market have helped cut the value of shares in LSL Property (LSE: LSL) in half since the beginning of 2014. Over this period, earnings per share have declined by less than 20% as the firm’s diversified offering has helped it avoid the issues hurting other estate agents. 

As well as its estate agent division, LSL also provides services for landlords, valuation services for lenders for residential mortgage purposes, surveying services for private house purchasers, and the provision of Home Reports and professional services in Scotland. 

One of the company’s biggest clients is Barclays. Today the firm announced that its contract to supply UK residential survey and valuation services to the company has been extended, which should help boost confidence in LSL’s outlook. 

Dividend growth 

City analysts are not expecting much in the way of earnings growth this year but next year growth of 6% is projected, and the firm is on track to pay a dividend of around 10.3p to shareholders this year (based on last year’s numbers), giving a dividend yield of 4.5%. That said, considering the company reported a 34% increase in adjusted earnings per share for the first half, I would not rule out a full-year dividend hike to reward investors. 

Shares in LSL currently trade at a highly attractive valuation of 9.2 times forward earnings. 

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