It’s worth noting that this list is more indicative of how ChatGPT works than a definitive list of shares to buy. I’ll break down why seemingly smart ‘insights’ often miss critical nuance.

Predictable choices

Admittedly, ChatGPT made a good effort at diversification. Avoiding a single theme or sector, it spread risk across healthcare, financial services and consumer goods. That gave me reassurance, as a long-term portfolio needs resilience, not just high yields.

As expected, household names featured prominently. GSK was chosen as a core income option, offering an attractive dividend backed by cash-generative pharmaceutical operations. Its recent restructuring has helped sharpen focus on core strengths and its balance sheet is improving.

Similarly, AstraZeneca appeared as a classic growth-leaning holding. Its modest yield is supplemented by a strong drug pipeline and global footprint promising long-term growth.

Two of its more questionable choices included Diageo and Ocado Group, two beaten-down companies with uncertain futures. Lloyds and Unilever were obvious choices, albeit somewhat uninspiring and, once again, it named ‘Royal Dutch Shell’ (despite the company changing its name years ago).

It also picked BT Group and Next but made one surprising choice I’d not heard of — Treatt (LSE: TET). This unusual inclusion prompted me to dig deeper.

A niche operator

Treatt’s a specialist manufacturer of natural flavours and fragrances used by global food, beverage and consumer goods companies – an appealing niche. Demand for natural ingredients, clean-label products and premium tastes has been growing steadily, driven by changing consumer preferences rather than short-term economic cycles.

As a result, Treatt benefits from long-term structural trends rather than relying on fleeting fashions.

Another key attraction is the quality of its customer relationships. Treatt typically works closely with blue-chip multinational clients, embedding itself deep within their supply chains. These long-standing partnerships create high switching costs and give revenue a level of predictability that’s unusual for a company of its size. That stability supports consistent cash generation.

Another key attraction is the valuation. The stock’s trading at 53.9% below fair value using a discounted cash flow (DCF) model. On top of the growth potential that implies, it has a 3.88% dividend yield, adding appeal to income investors.

However, there are some risks. Such a small stock is at high risk from volatility and even a small earnings miss could send the price tumbling. It also means it’s more exposed to input cost inflation, currency movements and the execution risk of its expansion strategy.

Final thoughts

I like that ChatGPT went out on a whim and chose a stock I hadn’t heard of. It gives me some insight into how it works and makes me question my own analysis techniques.

However, I don’t see a huge advantage for Treatt over other similar small-cap dividend stocks. Maybe AI knows something I don’t but, in my opinion, I won’t consider buying Treatt shares right now. But my interest is piqued – and I’d be more than happy to see myself proven wrong.

The post I asked ChatGPT for the 10 best UK shares to invest in. Here’s what it said… appeared first on The Motley Fool UK.

Our monthly Best Buys Now are designed to highlight our team’s three favourite, most timely Buys from our growing list of small-cap recommendations, to help Fools build out their stock portfolios.

Why we like it: “Treatt (LSE: TET) is a speciality chemicals business that focuses on providing ingredients for customers primarily in the food & beverage space. Between 2012 and the end of 2023, CEO Daemmon Reeve and the board have successfully repositioned the company from being a low-margin supplier of commoditised bulk chemicals into the relatively-higher-margin player it is today. They’ve done this by moving up the value-added chain and working more closely with customers to supply specialised ingredients tailor-made for their products.

“While Reeve has departed the business, Treatt’s performance over the past few years has been impressive, and new chief exec David Shannon inherits a company operating in a position of strength. The company’s newly upgraded UK HQ and expanded facility in Florida give it expanded and upgraded lab, production, and warehousing facilities, which management believes will provide a base for continued growth. With a large and growing end market to target, and an attractive strategy to continue working its way up the value-added chain, we believe Treatt’s long-term potential is exciting, even if the new boss will have to work to gain the trust of the market in the same way as longtime CEO Reeve did.”

Why we like it now: Treatt shows strong financial performance, with 16% H2 revenue growth driven by organic business expansion and a 7% increase in adjusted EBITDA, thanks to growth momentum in China. Moreover, the company reduced its net debt significantly to £0.7 million, reflecting robust cash generation and cost discipline. It is now trading at 20.9 times earnings versus the industry leaders of 36 times. We are convinced that its recent record of increasing profits and managing spending against tough market conditions makes this a price worth paying.

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Even with £300 a month to spare, building wealth and income in the stock market’s possible. In fact, given enough time, investors could end up with a £1.4m nest egg generating a £56k second income stream. Here’s how.

Unleashing the power of compounding

Since its inception in 1984, the FTSE 100‘s provided investors with an average total return of around 8% a year. At this rate, investors starting with £10,000 in the bank while topping it up with £300 each month would reach £1.4m within 41 years. And by following the 4% withdrawal rule, that translates into a £56,000 passive income.

Needless to say, it’s a pretty long wait. But it’s still an achievable milestone for those who start putting aside money early on. The problem is that there’s no guarantee that the FTSE 100 will continue to deliver this level of returns moving forward. In fact, looking at the past decade alone, the returns have actually been closer to 6%, increasing the timeline to over 50 years!

This is where stock picking may be able to come to the rescue. Instead of tracking an index, investors can take portfolio construction into their own hands, opening the door to potentially market-beating returns.

If successful, achieving average gains closer to 10%, or even 12%, could drastically shorten the wealth-building process from half a century to as little as 30 years. And for those able to wait for 50 years, a portfolio could reach as much as £15.6m!

Achieving double-digit returns

On paper, earning 12% sounds simple enough. But in practice, it can be quite challenging. Earning double-digit portfolio returns usually requires a bit of risk-taking within the small-cap space. These smaller businesses have a lot more capacity for long-term growth. But their size also acts as a handicap, given their reduced access to capital and lack of industry dominance. In other words, the higher the potential return, the greater the risk.

Looking at the London Stock Exchange today, one company that might have what it takes to deliver such gains is Treatt (LSE:TET). The speciality chemicals enterprise works with beverage and fragrance companies to develop specific sugar-free flavours and natural scents.

In recent years, the business has encountered quite a few challenges. Overstocking from the pandemic has led to material destocking in recent years, driving down demand and, in turn, volumes. But while sales continue to endure a cyclical downturn, management’s been busy optimising the business. And in its most recent results, operating margins are actually on the rise.

This cyclical pattern’s quite similar to what happened the last time we encountered a major market downturn. During 2008, demand dropped, management focused on cost disciplines, and the stock went on to deliver an almost 3,000% return by its peak in late 2021.

That’s the equivalent of a 28% annualised return. And while this level of growth’s unlikely to repeat, today’s cheap price certainly indicates tremendous potential lies ahead once conditions in the chemical market improve.

The post Saving £300 each month? Here’s how I’d aim for a £56k passive income appeared first on The Motley Fool UK.

Over the past five years though, the shares have moved up by only 12%. In other words, before the latest update, they have basically moved sideways over the long term.

Digging into the share price history in more detail, things look more interesting. Over the past few years, Treatt shares soared then fell sharply. They are now 65% below where they stood at the start of 2022.

But the business is a proven one: in the first half it generated profit before tax and exceptional items of over £7m, slightly better than last year.

It has an established customer base and long expertise in its specialist field of flavouring ingredients.

Could now be the moment for me to buy in, hoping for sweet long-term returns?

Good business, once-stretched valuation

Billionaire investor Warren Buffett says he likes to buy into great businesses at attractive prices. I take a similar approach.

I think Treatt has a lot going for it as a business. There is high demand from customers like food and drink makers. Treatt has its own factories and proprietary formulas that mean it can offer unique products to its customers.

But even after the 65% share price decline, the FTSE 250 stock continues to trade on a price-to-earnings ratio of 18.

Yet while the company has grown sales strongly in recent years, sustained earnings growth has been harder to come by. Last year’s post-tax profits of £10.9m were almost the same as in 2020 (and markedly below the prior two years).

Several years ago I thought the Treatt share price was too high. Even now it has fallen back, I do not think it is in bargain territory. It certainly is not what I would call a steal.

Looking to the future

But just because a share is not a bargain does not mean it could not still be a good long-term investment.

Treatt does have some appeal to me as an investor. Although first-half revenues were 5% smaller year on year, I think the company’s international manufacturing footprint expansion over recent years has helped set it up for long-term growth.

Net debt is modest at £10.3m, and the company said it has a solid sales order book and healthy sales pipeline.

But while it may be a good business, is it a great one?

Thinking about value as an investor

Profit margins in its industry are decent but not huge: Treatt’s net operating margin was 11% in the first half. Price jumps in commodities like orange oil can lead to weaker demand, as happened during the period. Meanwhile, as consumer tastes and trends change, the company needs to keep spending money on making its product offering relevant.

While it has been consistently profitable in recent years, those earnings have moved around more than I would like – and not always in the right direction.

For now, Treatt strikes me as a perfectly good business but not an obviously great one. I do not think its valuation is especially attractive and will not be adding this FTSE 250 share to my portfolio.

The post 65% cheaper per share, is this proven FTSE 250 business now a steal? appeared first on The Motley Fool UK.

Tasty recovery play

Shares in ingredients manufacturer and supplier Treatt (LSE: TET) have lost 36% of their value in the last 12 months. That seems a pretty big fall for a company that had been performing brilliantly for long-time holders.

The company’s valuation was beginning to look very rich in the face of multiple economic headwinds. So, perhaps we shouldn’t be surprised that Treatt has been walloped by the market.

Still, I’m beginning to think this share could bounce back well in time. Despite raw material inflation and industry de-stocking, revenue is still rising. FY23 profits are also expected to be 11% above FY22.

Elsewhere, the firm has been paying down debt and boasts a great record of rising dividends. Those are two things I always like to see.

The forthcoming retirement of CEO Daemmon Reeve after 11 years is a potential drawback. As a result, I’m adding this stock to my watchlist until an update on his successor is provided.

Already climbing

MJ Gleeson (LSE: GLE) is a second small-cap stock I think could recover strongly in time. In fact, shares in the housebuilder have already jumped 32% year-to-date as investors grow increasingly confident that interest rates have peaked.

I reckon this is just the start though. Assuming a recession can be avoided (a key risk here), the company is likely to see more demand for the small, affordable starter homes that it builds in the North and the Midlands.

This tallies with Gleeson’s comment last week that a “more certain backdrop” means it expects demand to “pick up into the seasonally stronger spring selling season“.

In the meantime, the balance sheet looks strong. There’s also a decent 3.2% dividend yield that’s likely to be covered more than twice by profit. Naturally though, it goes without saying that this income can never be guaranteed.

Good outlook

Former high-flyer Mortgage Advice Bureau (LSE: MAB1) completes the trio of small-cap stocks that I’m considering.

Back in September, CEO Peter Brodnicki reflected on “an exceptionally challenging year” with multiple interest rate hikes creating huge problems for mortgage brokers. On a more positive note, he also said that the company had still managed to outperform its market.

Looking ahead, the Derby-based business believes the “underlying level of demand for home ownership and home moves remains strong“.

All this may help to explain why the share price has been moving upwards ever since. A 22% rise in the last month is particularly encouraging, even if the shares may still be some way off the 52-week high hit back in May.

My main concern here, however, is the valuation. Changing hands for 24 times forecast FY23 earnings, the shares are far from cheap. So there could be some more volatility ahead if rate cuts take longer than expected to materialise.

That’s when it may be the time for me to consider building a stake here.

The post 3 FTSE shares I’d consider buying for a massive market bounce-back in 2024 appeared first on The Motley Fool UK.

Our monthly Best Buys Now are designed to highlight our team’s three favourite, most timely Buys from our growing list of small-cap recommendations, to help Fools build out their stock portfolios.

Why we like it: “Treatt (LSE: TET) is a speciality chemicals business that focuses on providing ingredients for customers primarily in the food & beverage space. Since becoming CEO in 2012, long-time Treatt employee Daemmon Reeve and the board have successfully repositioned the company from being a low-margin supplier of commoditised bulk chemicals into the relatively-higher-margin player it is today. They’ve done this by moving up the value-added chain and working more closely with customers to supply specialised ingredients tailor-made for their products.

“Treatt’s performance over the past few years has been impressive. The company’s newly upgraded UK HQ and expanded facility in Florida give it expanded and upgraded lab, production, and warehousing facilities, which management believes will provide a base for continued growth. With a large and growing end market to target, a proven management team at the helm, and an attractive strategy to continue working its way up the value-added chain, we believe Treatt’s long-term potential is exciting.”

Why we like it now:

The full-year trading update Treatt released last week was a positive one. Volumes are still constrained but against a tough macroeconomic backdrop management are expecting to deliver a 3% uptick in constant currency revenue (5% actual) with pre-tax profits recovering by roughly 11%. Cash generation also appears strong as net debt is expected to halve to a very, very manageable £10.5m.

With its investment programme complete and this update suggesting a rocky year of internally and externally-induced issues in 2022 is behind it, we think Treatt can now get back on track with its long-term strategy to grow market share in its core capabilities, extend into additional categories, and continue its march up the value-add chain. At just under 25 times times trailing earnings Treatt isn’t dirt-cheap but for a quality, growing company with plenty of defensive characteristics we think it’s worth taking a look at in October.

The post Just released: our 3 top small-cap stocks to buy in October [PREMIUM PICKS] appeared first on The Motley Fool UK.

The shares have fallen 31% so far this year, however, and are down 9% over five years. As its latest trading statement issued today (10 October) shows, business continues to move forward well at the company. So, has the markdown in the Treatt share price been overdone?

Impressive performance

In my opinion the market update, covering the company’s most recent financial year, showed a business firing on all cylinders.

Revenues grew 5% year on year, tax before profit and exceptional items Is expected to come in 11% above the prior year and net debt more than halved, to around £10.5m.

The company has also been setting itself up for future success. It has finished its UK site consolidation as well as seeing growth in its Chinese and coffee businesses in line with expectations.

Some less tasty risks

One of the risks to food companies in recent years has been the impact of ingredients price inflation and whether passing that on to customers in the form of higher prices could hurt sales. I still see that as a risk for Treatt, so was pleased that the update said the business has successfully changed prices to recover such inflation. That is preferable to cutting profit margins, in my view.

Of course, there are other risks.

The company’s premium line of products saw no revenue growth. That could suggest consumers are tightening their belts. A worsening economy could mean the division sees reduced sales this year.

But on balance, Treatt looks like it has the makings of a resilient, proven performer. It benefits from having its own production facilities and some unique products, helping set it apart from rivals.

Share price is not cheap

So why has the share price been tumbling?

I think the issue here is one of valuation. Yes, Treatt is a strong business. But using last year’s confirmed earnings (not the provisional information in today’s statement), its market capitalisation of over a quarter of a billion pounds puts it on a price-to-earnings ratio of 24

Given the company’s modest revenue growth and decent but unremarkable net profit margins (under 10% last year), I think that valuation continues to look high.

I would not be surprised to see the share price fall further, especially if its outlook worsens at all, due to lower demand or higher costs.

Long-term view

As a long-term investor, I like the characteristics of the business.

Although revenue growth is modest at the moment, I think profitability could increase notably in the next several years. The capital expenditure associated with the factory building and site consolidation of recent years has been completed. Hopefully now the efficiency gains could feed through to higher profits.

However, I see the share price as already factoring in such potential. For now, I do not think the shares are a bargain. I have no plans to add them to my portfolio.

The post Does the Treatt share price reflect its long-term potential? appeared first on The Motley Fool UK.

The markets seem to be pricing in Armageddon. But there isn’t that kind of disaster going on inside many enterprises. And they’ve started surprising the market with upbeat trading statements.

When that happens, we often see stocks shoot up to adjust valuations. And those moves higher will likely better reflect the positive reality on the ground.  

Moving higher

One good example of the positive-news effect occurred in my own portfolio this morning. Quixant released a positive trading update and the share price is around 7% higher today, as I write.

The company provides engineered technology products mainly for the global gaming and broadcast industries. And it said today the business has “continued to perform strongly” since the half-year results on 6 September. 

The directors now believe full-year results will come in “ahead of market expectations”. And chief executive Jon Jayal said the recent good operational performance has been driven by “ongoing buoyant customer demand, continued recovery in gross margins and ongoing management of supply risk.”  

Resilient demand

But Quixant isn’t the only business trading well. Shares in Zotefoams shot up by almost 25% up on the release of today’s upbeat trading statement. 

The company describes itself as a world leader in cellular materials technology. And it reported “continued momentum through Q3 and full-year expectations increased”.

So far, revenue is running around 24% higher year on year. And the company reckons it is seeing “continued resilient demand across most of its end market segments.”

Looking ahead, the directors said demand entering the final quarter “remains encouraging” and the company has good visibility of confirmed orders for the remainder of 2022.

Revenue up, earnings down, shares higher

Meanwhile, Treatt (LSE: TET) also put out a promising update this morning covering its trading year to 30 September. And the share price is almost 8% higher. 

The company manufactures and supplies natural extracts and ingredients for the beverage, flavour and fragrance industries. And the update reports revenue growth for the year of 9% at constant currency rates, “in line with market expectations”.

However, the company issued a profit warning in August. And chief executive Daemmon Reeve said today the business was “impacted by some specific factors in the second half which ultimately led to a disappointing outcome for the full year.”

Nevertheless, the company produced positive growth in sales for the year, Reeve said, “reflecting a good performance across the vast majority of our categories.”

These three businesses are far from being on their knees. And there are many others like them for me to find right now. I think more UK shares are likely to surprise the market in the coming days and weeks. However, it’s still possible for businesses to run into difficulties. Positive investment outcomes are never certain with stocks and shares.

Nevertheless, I think it’s a good time for me to look for UK shares to buy for the long term. And my expectation is that more companies will release upbeat trading statements in the coming days and weeks.

The post These UK shares surprised the market and there’s likely more to come appeared first on The Motley Fool UK.

After browsing through my watchlist, I’ve whittled down my selection to two top-notch businesses I believe offer the potential for outsized returns in the long run.

Let’s take a look.

One of the best UK shares to buy now?

The construction industry is known for its cyclicality. But with the US government signing a $1trn nationwide infrastructure bill, there’s plenty of work to last for years. And one prominent beneficiary of this is Somero Enterprises (LSE:SOM).

The company designs and manufactures concrete-laying screed machines. It’s hardly the most exciting business out there, but it plays a vital role in the sector, reducing both time and labour requirements to complete infrastructure projects while achieving higher quality results.

Like many other UK shares, Somero’s stock price has been hammered in the last 12 months, dropping by 25%. The latest results show performance in its flagship US operations continues to thrive. And management has successfully managed to raise prices to offset inflationary pressures.

However, the situation in its other markets, namely Europe and China, is causing grief. Shipping delays and ongoing Covid restrictions have started impacting margins which seem to have spooked investors.

Yet, while these are valid concerns, they currently look like short-term problems, in my eyes. Therefore, I can’t help but see the recent drop in share price as an opportunity to bolster my existing position within my portfolio.

Another bargain hiding in plain sight?

Somero isn’t the only business to have lost a quarter of its share price lately. Treatt (LSE:TET) has taken quite a big blow on the back of its latest results.

As a reminder, the company is a chemical manufacturer. It uses natural ingredients to design flavours and fragrances for drinks, hygiene and fragrance products. Treatt has fallen on tough times lately. The firm has struggled to pass on all of its inflationary costs to customers. Meanwhile, significant operational disruptions in China have caused management to cut profit guidance, from £21.7m to £15.3m.

Given the current fearful state of the stock market, it’s not surprising to see investors sell off shares of this UK business.

But, as horrendous as all this looks, it’s worth pointing out that the firm’s order book continues to grow. To me, that indicates demand for its products remains strong. Furthermore, just like Somero, the problems plaguing this company all look like short-term issues that may naturally resolve themselves.

With the long-term potential of this young enterprise still intact, and the balance sheet remaining strong, I can’t help but feel a buying opportunity for my portfolio has emerged.

The post 2 UK shares I’d buy now at double-digit discounts appeared first on The Motley Fool UK.

Flavour of the month

As a quick introduction, Treatt is a chemical company that specialises in creating and selling natural extracts and ingredients for foodstuff, beverage, fragrance, and consumer goods markets. It has a global footprint with bases in the UK, US, and China.

So what’s happening with Treatt shares currently? Well, as I write, they’re trading for 754p. At this time last year, the stock was trading for 1,154p, which is a 35% drop over a 12-month period.

I believe Treatt shares have fallen due to the macroeconomic headwinds and the recent stock market correction (more on that later). It is worth noting that many stocks have suffered a similar fate recently.

FTSE stocks have risks

The biggest issue I have with Treatt shares currently is the headwinds mentioned above. Soaring inflation, the rising cost of raw materials, and the global supply chain crisis are having a material impact on many businesses. In Treatt’s case, these issues can affect the cost of its ingredients and squeeze profit margins. Less profit means less to return to shareholders.

Furthermore, the supply chain issues could affect Treatt’s ability to fulfil orders. This is something I will keep an eye on, as if it is unable to fulfil orders it could negatively affect sales and performance, which underpin returns.

The bull case and what I’m doing now

I believe Treatt has defensive traits as it provides vital components in the food manufacturing process. Food is an essential item, even in times of economic uncertainty and the current, well-documented cost-of-living crisis. After all, no matter the outlook, we all need to eat. Stocks linked to the production of food are therefore defensive, in my opinion.

So what about Treatt’s performance? I do understand that past performance is not a guarantee of the future. Looking back, I can see consistent growth of revenue and profit in the past four years. Due to the pandemic, 2020 levels dropped but have bounced back in 2021 to exceed pre-pandemic performance.

Positive performance underpins dividend payments that would boost my passive income stream. Treatt shares currently have a dividend yield of 1%. It is worth mentioning that dividends can be cancelled at the discretion of the business at any time, however.

Finally, I noticed that insiders own Treatt shares. I usually find this extremely positive. Those running the business are best placed to know if it will succeed. If they are willing to part with their own cash and believe they could secure returns, this helps me believe I could do the same.

Overall, I believe Treatt could be a good FTSE stock to add to my holdings. Although the shares have come under pressure recently, I expect them to bounce back. I believe current headwinds are shorter term issues, and I invest for the long term. I would add the shares to my holdings and keep hold of them for a long time.

The post This FTSE stock has defensive traits! Should I buy shares? appeared first on The Motley Fool UK.