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Even with the FTSE 100 close to their highest levels in history, I think UK stocks look like great value right now. And there are a couple that make up a big part of my portfolio.
Neither is involved in the hot topic of artificial intelligence. But both have what I look for in stocks to buy: a durable business with something that distinguishes it from its competitors.
Games workshop
Nobody else does what Games workshop (LSE:GAW) yes. owns the war hammer franchise and that makes it impossible for other game companies to replicate their products.
The biggest risk is high interest rates that cause customers to spend less. That's a danger right now, but the business has excellent economics that should help in the long run.
Games Workshop generates £181m in operating income annually using £138m in inventory and fixed assets. This means that the company does not need most of the cash it generates to maintain its operations.
As a result, it is able to return most of that cash (around £139m) to shareholders in the form of dividends. And all this while increasing income at an average of 13% annually.
JD Wetherspoon
At first sight, JD Wetherspoon (LSE:JDW) doesn't look that attractive. But having the lowest prices in the UK pub industry puts it in a great position.
Importantly, the company also has the lowest costs. There are some things you can't control – particularly energy and staff costs – and they are a risk that investors should be aware of.
However, the company benefits greatly from economies of scale. In addition to this, owning the majority of your estate outright reduces the amount you have to pay in lease obligations.
This puts it in a much stronger position than its competitors. And a differentiated business in an important sector is exactly the type of stock I want to have in my portfolio.
Diversification
Having 17% of my ISA committed to two UK stocks makes it seem like I'm not interested in building a diversified portfolio. But it's not as simple as this.
One point is that diversification is not just about owning more stocks. A portfolio with five US technology companies is less diversified than one with three stocks from different sectors and regions.
This is relevant to the UK shares I own. Games Workshop generates the majority of its revenue in the US, limiting the effect of the stagnant UK economy on my investments overall.
Therefore, a portfolio could be more diversified than it seems. Two UK companies focused on discretionary consumer spending could have quite different risk profiles.
Portfolio creation
My stocks and Shares ISA is just one part of my overall investment portfolio. But a significant amount is dedicated to UK stocks, especially Games Workshop and JD Wetherspoon.
While I look to own businesses in different industries and geographies, my primary focus is quality. That's why I've invested relatively heavily in these two UK stocks.
