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When share prices are going up, it can be harder to find great investment opportunities. But there are still UK shares I’d buy today, even with the stock market up this year.
As Warren Buffett says, the job of an investor isn’t to work out whether a stock will go up or down in the near future. Instead, it’s to figure out what a business is going to do.
When I look at UK shares at the moment, I think I can still see businesses that can generate a good return for investors. Two in particular stand out to me at the moment.
First on my list is Forterra (LSE:FORT). The stock is up almost 17% since the start of the year.
Despite this, I think it’s one of the best value stocks in the index today. It trades at a price-to-earnings (P/E) ratio of around 8 and has a dividend yield of around 5%. Even with interest rates at 4%, I think that’s an attractive proposition. And the positives don’t stop there.
A look at the company’s balance sheet indicates to me that it’s in a good position. And it has a strong competitive position too, with the company’s London Brick products used in around 25% of UK housing stock.
The biggest risk I can see with Forterra is the possibility of a significant slowdown in the housing market. I view that as a realistic prospect with interest rates continuing to rise.
Over the long term, though, I don’t think this will be a serious issue for Forterra shareholders. The UK has what I think will prove to be an enduring shortage of housing stock that will mean near-term headwinds prove temporary. So I think that any near-term slowdown in demand will also prove temporary.
InterContinental Hotels Group
InterContinental Hotels Group (LSE:IHG) is another stock on my list. The stock is up 19% since the start of the year, but it’s quite a differnet type of proposition to Forterra.
InterContinental Hotels trades at P/E ratio of 30 and has a dividend yield of 1.9%. That makes it look much more expensive than Forterra at today’s prices.
The truth is, it is more expensive that Forterra and that high price tag is a risk. As Buffett points out, any business can be a bad investment at the wrong price.
I think that an investor buying the stock today would get something good for their money, though. The company’s business model helps it generate cash for shareholders.
As a franchisor, IHG has very low capital requirements. Around 89% of the cash the company generates through its operations becomes free cash available to shareholders.
With Forterra, the situation is quite different. Forterra uses around 61% of the cash it generates, meaning that it that only 39% becomes free cash flow.
Forterra and InterContinental Hotels are two very different types of stock. But I’d be happy buying either for my own portfolio at today’s prices.
Forterra is a capital-intensive business, but its low price tag makes it attractive to me. IHG has a much higher valuation, but its asset-light model identifies it as a quality investment.