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The UK economy grew in the last quarter of last year and avoided a recession. But business and investor sentiment remains fragile. That helps explain why some London-listed companies continue to trade at attractive valuations. Buying UK stocks that cheap could help me build wealth in the long run, but I’m not just focused on price. I look for deep value by investing in companies that I believe have great prospects.
Here are two that I have purchased and have no plans to sell.
Sports
One of the UK retail success stories of the last two decades has been Sports (LSE: J.D.). He has not only perfected a highly successful business model in Britain, but has replicated it internationally and built a massive global business.
In fact, what other retailers see as threats, JD has seized on as an opportunity. It has expanded significantly online to sell to its digitally savvy customer base. But at the same time, JD has proven itself as a classic physical retailer. In fact, it plans to open several hundred new stores annually for the next five years.
Other plans include targeting double-digit percentage growth in revenue and achieving operating cash generation of £1bn a year. That’s not the same as earnings (on a company’s statement of cash flows, operating cash flows can be absorbed or boosted by investing and financing cash flows).
But cash flows are important, and I think the projection helps show why JD Sports stock looks like a good value to me right now. With a market capitalization of £9bn at the moment, the company is trading at around nine times projected operating cash flows. I see it cheap.
Risks and disadvantages
What about the possible risks involved?
Rapid expansion could increase costs, hurting profitability. The company may also stumble upon international expansion, as many UK retailers have before.
But I remain optimistic about the proven potential of JD Sports.
In the past decade, the stock has skyrocketed more than 25 times. In other words, by investing less than £40 a decade ago, you could have bought shares that are now worth £1,000. Historical performance is not a guide to what will happen next, but it underscores the company’s impressive recent performance.
british american tobacco
Another one of the UK stocks that I plan to hold for many years sells something much less healthy than sportswear. british american tobacco (LSE: BATS) relies heavily on the sale of cigarettes. As the demand for them decreases, I expect sales to take a hit.
The company has some flexibility in trying to make up for that by raising its prices. The addictive nature of nicotine and a range of premium brands such as Stroke of luck give the company pricing power.
What I think sometimes gets overlooked, though, is just how big the company’s cigarette business still is. Last year it sold an average of more than 10 billion cigarettes a week. The market is in decline, but I think it still has a long way to go.
The manufacturer is also rapidly developing its non-cigarette business. That should break even next year and could end up contributing significantly to its massive cash flow generation. The company raised its dividend once more this year and now yields 7.8%. I plan to keep it in my UK stock portfolio for many years.
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