3 UK stocks to avoid this summer

John Choong — Wed, 25 May 2022 06:04:00 +0000

Inflation data released for the month of April wasn’t pretty, as the consumer price index hit 9%. As the cost of living crisis continues to weigh on consumer spending, here are three UK stocks I’m avoiding this summer.

An unfashionable stock

boohoo (LSE: BOO) is one of the UK’s biggest fashion retailers. The online fashion retailer had already been 30% down this year, but plunged a further 12% after it released its FY22 results. Nonetheless, it’s managed to recover most of its post-earnings loss since then.

The firm had already been starting to see a slowdown in sales growth due to “Significantly longer customer delivery times as a result of the pandemic”. Nevertheless, its new distribution centre in the US is expected to go live in mid-2023. With next day and two-day express delivery options available, this could help ease the supply chain constraints that boohoo is currently facing, and help the stock price.

However, with inflation continuing to weigh on consumer spending, I expect sales growth to continue declining. Management shares my sentiment too, as guidance for FY23 is for low-digit revenue growth. Expensive freight costs have also impacted its bottom line as the firm saw its profit margin decline from 5.2% in FY21 to -0.2% in FY22. For that reason, I won’t be buying this stock for now.

In the eye of the storm

The unfortunate events of the Russia-Ukraine skirmish has battered the Ferrexpo (LSE: FXPO) share price. Commonly known for being a high-dividend yield stock, the stock is now trading at 65% off its all-time-high.

The Ukraine-focused firm faces a large amount of uncertainty given the ongoing war there. Any further escalation might run the company out of business as its mining operations are located just east of Kyiv, where it’s more susceptible to Russian attacks. Additionally, China’s city-wide lockdowns have driven iron ore prices down. This will inevitably impact Ferrexpo’s top line in the near to medium term. Most importantly, the firm decided to defer its dividend payments. The board said that it will continue to assess the situation in Ukraine and make a decision on dividends when appropriate. With many investors initially buying the stock for its dividend, this is a stock I’m avoiding.

Getting the boot

Aside from sky-high inflation, Dr Martens (LSE: DOCS) will also have to worry about the recent retail sales figures. Although positive for the month of April itself, retail sales for the three months to April fell 0.3% as high inflation hurt purchasing power. That’s one reason why its stock is down 50% this year.

The majority of the firm’s revenue stems from the Americas and EMEA region. With inflation continuing to spiral out of control, this doesn’t bode well for Dr Martens’ near-term outlook. As central banks in these regions rush to raise interest rates, its debt levels start to become even more alarming. The firm has a debt-to-equity ratio of 140%, a declining free cash flow, and higher operating expenditure. These aren’t factors that are favourable when I invest in UK stocks, especially in a high interest rate environment. As such, I’ll be looking to purchase other shares with much more favourable fundamentals.

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John Choong has no position in any of the shares mentioned at the time of writing. The Motley Fool UK has recommended boohoo group. 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.

I’d buy dirt-cheap British shares today and hold them for a decade

James Reynolds — Thu, 24 Mar 2022 07:49:23 +0000

Purchasing dirt-cheap British shares, and knowing I’ll own them for decades, strikes me as a fantastic method to develop long-term wealth. Right now, I think that many great British companies are trading for way below their true values. That being said, nobody knows where share prices will go next, especially in the near term. I might easily stock up on what I believe are bargain shares now, only to discover that they’re much cheaper a year from now. This is why, when I buy shares, I fully intend to own them for at least 10 years.

I’m buying dirt-cheap British shares today

History shows stock markets have beaten practically every other investment over the long run. If I can somehow buy shares while they’re cheap rather than costly, they’ll do even better. I think that recent market downturns and the ongoing effects of the Covid-19 pandemic have created some fantastic buying opportunities. Some company shares are at their lowest prices in over a decade and I’m eager to scoop them up while I can. For example, Rolls-Royce is currently trading at 94.16p, its lowest since 2005.

I must keep in mind that just because a stock is cheap and British, doesn’t mean it’s automatically a good buy. There’s usually a solid reason prices have fallen. Sales may be declining. The costs of doing business may be increasing. The competition could be too fierce, and smaller, more agile competitors may be stealing market share. The company’s management plan might have gone off the rails or consumers may have lost interest in its product.

However, there are a few key metrics I’m keeping an eye out for that could indicate when a company’s stock is selling for far less than it ought to be. These indicators can be the P/E ratio, the discounted cash flow or even the amount of investment pouring into the firm to help develop new products.

The key is to hold for the long term

Before buying British shares that appear to be dirt-cheap, I’ll examine them for all of these risks. I prefer organisations that have experienced minor setbacks and appear to be on the mend. In some circumstances, the setback was beyond their control (the pandemic is a good example). In other cases, the market may have reacted too strongly to a single set of disappointing data. Their current prices may not reflect their future possibilities in this situation.

To keep with the Rolls-Royce example, the aeronautics company took a serious hit to revenue in 2020, while operating costs also went up. But after careful restructuring, it was able to come back to profitability in 2021. This restructuring could now go on to increase its profit margins for years to come. All I need to do is be patient.

Of course, the biggest risk is that the firm will never recover. Sometimes, no amount of restructuring can save a company. Just ask Toys ‘R’ Us. To counter this, I would establish a well-balanced portfolio of at least a dozen equities to spread my risk. As global stock market volatility increases, there should be plenty of cheap British shares to choose from.

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