Investing in top-quality UK shares at a bargain price is a tried-and-tested recipe for wealth creation. And while the stock market has been on a roll so far this year, there are still plenty of undervalued opportunities to capitalise on.
It goes without saying that this is an interesting way to build wealth, even if you start from scratch later in life.
By snagging bargains, you can earn above-average returns. And even a few extra percentage points can lead to a significantly larger portfolio in the long run.
In fact, by taking the right steps today, you could retire earlier.
Invest in the best UK stocks
In the short term, the stock market can be extremely fickle. Sentiment and momentum dictate stock prices on a daily, weekly or even monthly basis, creating volatility that makes the stock market seem like a casino.
However, if you look over several years, it is ultimately the quality and success of the underlying companies that determine the performance of a stock.
That makes life a lot easier for investors, but we now know what to look for – high-quality companies with the ability to sustain long-term expansion. And while short-term volatility can be uncomfortable, it also creates great buying opportunities for prudent investors.
So what should investors look out for? Identifying the best companies of the future is not an easy task. After all, the components of the FTSE100 are very different today than they were 50 years ago. But with a few simple filters, the list of potential candidates can be narrowed down considerably.
By focusing exclusively on companies with strong balance sheets, high cash flow and notable competitive advantages, one can exclude the majority of underperforming UK stocks. At this point, investors can dig deeper and focus on valuations.
An example
AstraZeneca(LSE:AZN) is currently the largest company on the London Stock Exchange by market capitalization. The pharmaceutical giant is behind a wide range of life-saving medicines and has a diverse pipeline of future products.
With demand for healthcare not going away anytime soon and new products on the way, it’s fair to say the company has fairly sustainable cash flows. And its patent portfolio gives it a broad line of defense against its competitors.
And what about the balance sheet? In March of this year, the group had debt and equivalents of just over $34.5 billion. That is, of course, a pretty high amount. And it shows how capital-intensive drug development is.
But despite appearances, the balance sheet is not over-leveraged. $8 billion in liquid assets provide short-term flexibility. More importantly, the group’s operating profits can cover interest expenses more than seven times.
Risk and return
Of course, other factors must be considered when evaluating quality. But this brief analysis shows that the company is in a strong position. That is probably why the shares are trading at a price-to-earnings ratio of 38. For comparison, the market average is usually between 12 and 15.
What does this mean? In short, AstraZeneca may be a top-notch company, but its shares aren’t cheap, so it may be wiser to look for other potential long-term opportunities.
The post No savings at 40? I’d buy cheap UK shares to retire richer appeared first on The Motley Fool UK.
Further reading
Zaven Boyrazian does not own any of the stocks mentioned. The Motley Fool UK has recommended AstraZeneca Plc. The views expressed on companies mentioned in this article are those of the author and may therefore 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.
Motley Fool UK 2024
