The stock market made an impressive recovery last year, following the spring crash. And with UK shares also starting 2021 strongly, sentiment is clearly improving.
They say a rising tide lifts all boats. But I don’t see this as a reason to be complacent about the quality of the businesses we invest in. With this in mind, here are five UK shares I’d be happy to buy and five I’d avoid.
Contrasting technology stocks
Supply@ME Capital has negligible revenue, but a market capitalisation of £197m. With directors offloading shares — and the company’s nascent “Inventory Monetisation©” fintech platform (using “innovative legal schemes”) unproven in practice — I’m avoiding the stock.
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But I’d gladly buy shares in £6.3bn-cap Sage. It’s the global leader in technology that helps small- and medium-sized businesses manage their supply chains, inventory, invoicing, payments, cash flows, tax, and so on. Good profit margins and cash conversion point to a high-quality business.
Silver screen UK shares
International cinema group Cineworld had a weak balance sheet even before the pandemic. This was due to a risky debt-fuelled acquisition strategy. The £930m-cap firm last reported net debt of an eye-watering $8.2bn. I’m avoiding it, because I think a painful financial restructuring is inevitable.
But I reckon smaller UK chain Everyman is very buyable. It had a stronger balance sheet pre-pandemic, and reinforced it with an early equity fundraising. The £93m-cap company last reported net debt of £82.7m. Post-pandemic, I think it can resume its prudently-paced growth.
Forget jam tomorrow
The £95m market valuation of Versarien seems to rest on hopes for its graphene business. However, a multitude of collaborations announced in recent years have produced very little revenue (£142,000 last year). It looks a perennial jam-tomorrow stock to me, so I’m avoiding it.
However, I’d happily buy £1.9bn-cap stock Synthomer. This speciality chemicals group made a £100m profit last year on £1.5bn revenue. Its 2020 performance is expected to be ahead of that, and I think it has solid longer-term growth prospects too.
UK shares in far-flung places
Eurasia Mining is a Russian miner of platinum group metals (PGMs). Last year, this £1.1m revenue earner said it was entering a formal sale process. The share price has gone bonkers, and the company’s valuation has risen to a mind-boggling £938m. I’m avoiding the stock because I see little upside. Further, I reckon the shares could crash if no bid materialises.
Meanwhile, £251m-cap Sylvania Platinum generated $114m of revenue last year. It operates in the PGM-rich Bushveld Igneous Complex in South Africa, and pays generous dividends. The shares have risen strongly since I first tipped it in 2018, but I still see the stock as very buyable today.
Another tale of two contrasting UK shares
Online travel ticketing platform Trainline was burning cash even before the pandemic. I think we’ll see lower passenger volumes, due to more homeworking post-pandemic. I’m avoiding the stock as there’s no visibility on when, or if, it’ll generate enough free cash flow to justify a £2.1bn valuation.
By contrast. I’d be happy to buy fast-growing, cash-generative Gamma Communications. It’s profiting from the rise in unified communications as a service. I reckon its premium valuation — a market-cap of £1.5bn versus revenue of £329m last year — is justified by the size of its growth opportunity.
