In constructing a portfolio, investors often make a list of the top stocks in a given market to assess. In terms of UK shares, these three stocks are near the top of my watch list right now.
These companies are among the best-quality earners in their respective sectors. Additionally, each of these companies provide defensiveness and a relatively high margin of safety. That’s something I look for in my portfolio.
Let’s take a closer look.
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Top UK shares: Tesco
Grocery retail is an inherently defensive sector to invest in. We all need to eat. In times of uncertainty (as with the pandemic), supermarket plays such as Tesco (LSE:TSCO) tend to hold up quite well.
That being said, Tesco’s current share price remains significantly below its pre-pandemic highs. The company’s 4.2% dividend yield is juicy, when one considers where bond yields are today. Additionally, the company’s recent earnings growth and forward price-earnings ratio around 12 makes this stock an intriguing value pick I’m considering right now.
As far as risks go, Tesco is a company that is indebted to a degree that may be a cause for pause among some investors. This is a company that’s also in a slower-growth business, which is something to consider.
However, among UK shares with defensive business models and the potential for low double-digit total returns over the long term, Tesco finds its way onto my list right now.
BT
BT (LSE:BT.A) has been on a very nice ride of late. Over the past year, shares of this UK telecom player have risen more than 70% at the time of writing, as investors pile back into defensive options in an otherwise overvalued market.
This rather sharp increase in valuation may provide some uncertainty with respect to how much upside potential may remain with this stock. Additionally, concerns around rather unimpressive earnings of late continue to provide headwinds for those hoping for rapid near-term growth.
That said, there’s a reason these UK shares continue to outperform.
As fellow Fool contributor Royston Roche pointed out in a recent piece, BT has been aggressively pursuing operational efficiencies of late. The company’s modernisation programme could provide as much as £2bn over the five-year life of this strategy.
Additionally, the UK government has ramped up its focus on investing in the telecom sector. This is increasingly bullish for BT, one of the UK shares in the telecom space to secure more 5G spectrum recently.
On balance, BT shares provide an intriguing risk-reward profile, making this company one I’m considering for my portfolio today.
Aviva
The insurance sector is yet another hard-hit, but defensive, sector long-term investors such as myself have been looking at of late. Indeed, Aviva (LSE:AV) is one of the UK shares in the insurance space that has piqued my interest.
Aviva is an insurance provider with global reach, but an increasingly UK-oriented focus. The company’s recent sale of Aviva France for €3.2bn indicates its interest in staying close to home. For believers in the pandemic recovery thesis for the UK, more exposure is better.
Risks around a flattening yield curve remain. However, I think Aviva’s potential upside is far greater than its downside risk. Accordingly, this is a stock I’m watching closely right now.
