Stock market rally: 3 UK shares I’d like to buy now

Royston Roche analyses 3 UK shares which he believes have great potential to outperform the stock market in the long term.

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UK shares have started the year 2021 on a bright note, as the FTSE 100 index has risen 4.17% year-to-date at the time of writing. Considering the macro-environment challenges, I believe investors have a positive outlook on the UK economy.

3 UK shares with strong fundamentals

A dividend yield of 6.57% and a price to earnings (P/E) ratio of 13.10, Legal and General Group (LSE: LGEN) is one of my favourite UK shares. The stock rose about 45% in the past three months. It has delivered double-digit revenue growth in the past, and more importantly performed well in 2020 as reported in its November 2020 trading update. The company expects full-year 2020 operating profit to be similar to 2019. It has a strong balance sheet, the group’s solvency ratio is in the mid-170s (%), which is slightly better than the 173% reported in the first half the previous year.

The management intends to keep the final 2020 dividend flat and grow the dividends at low to mid-single digits from 2021. Understanding the company’s long-term plans, it has set an ambitious plan for 2020 to 2024: it wants the cash and capital generation to significantly exceed dividends, then it aims for the earnings per share to grow faster than dividends, and finally, a net surplus generation (i.e. including new business strain) to exceed dividends.

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Anglo American (LSE: AAL) is a great UK mining share in my book. It has a P/E ratio of 15.84 and a dividend yield of 3.33%. In its investor update in December 2020, the management expects volume growth of 20-25% over the next three to five years. The company is also on track to deliver the targeted $3-4bn run-rate of incremental annual improvement by the end of 2022. Looking into the unit costs for 2020, it is expected to reduce by 2%.

The mining EBITDA margin is sustained at 42%, supported by cost control and price strength across copper and iron ore. The management expects further margin improvement in the range of 45 to 50% in 2023. Production in 2021 is expected to increase by 14% and unit costs to decrease further by 3%. Its subsidiary De Beers has announced the biggest diamonds price increase of 5% as the industry starts bouncing back from the Covid-19 related shutdown, which is another reason for me to be positive about this company.

Next in my list of UK shares is Barratt Developments (LSE: BDEV). It has a P/E ratio of 18.07 and a dividend yield of 4.14%. I believe low mortgage rates will encourage more home buyers. The company has done well in the pandemic by preserving cash, has reduced operating costs, and more importantly ensured it safely continued its operations.

The recent trading update for the half-year ended 31 December 2020 was good. The company’s home deliveries rose 9.17% year-on-year to 9,077 and the average selling price increased by 1.1% to £283,000. It also continues disciplined and selective in land purchasing, which meets the hurdle rate of 23% gross margin and 25% return on capital employed. Finally, it has a stable balance sheet with a net cash position of £1.1bn.

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Royston Roche has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

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