If you’re looking for UK shares to buy today, it could be a good idea to follow the approach of Fundsmith portfolio manager Terry Smith. He’s the man they call ‘Britain’s Warren Buffett’.
Smith doesn’t do anything that you and I can’t do. He simply invests in high-quality businesses and holds on to them for years. Here, I’ll explain what he looks for in a company and show you how this approach to investing can help you find the best UK shares to buy.
Highly profitable companies
One of the first things Smith looks at when analysing companies is profitability. He likes companies that generate a high return on capital employed (ROCE). This sounds complex but it really isn’t. It simply means companies that can generate healthy profits on the money they put into their businesses. It’s an important concept because companies that can consistently earn a high ROCE tend to grow in value over time. Conversely, companies that earn a poor ROCE tend to decline in value over time.
In a presentation last year, Smith highlighted a UK company that consistently generates a high ROCE – Unilever. Over the last three years, Unilever’s return on capital employed has averaged approximately 25%. In other words, for every £1 the company has put to work, it has made a profit of 25p. That’s an excellent return.
Unilever shares – which Terry Smith holds in Fundsmith – have been a fantastic long-term investment. Over the last decade, they’ve risen about 165%. Investors have received regular dividends too. Today, Unilever remains one of the best UK shares you can buy, in my view.
A source of growth
It’s not just about a company’s ROCE though. Smith says there needs to be a source of growth. He likes investing in companies that have the potential for long-term ‘secular’ growth. Sources of growth he has identified include the world’s ageing population, consumerisation of the developing world, and premiumisation of the developed world.
Going back to Unilever, that’s a good example of a UK share with plenty of potential for growth. It generates over 50% of its revenues from the emerging markets. As incomes in emerging market countries continue to increase, more consumers will be able to afford its products.
Resilient to change
Smith also looks for companies that can protect themselves against the competition. Here, strong brand names can provide a competitive advantage. It’s worth pointing out that many of the UK companies he holds in Fundsmith, such as Unilever, Reckitt Benckiser, and Diageo, own well-known and trusted brands.
Additionally, he looks for companies that are resilient to technological innovation. The UK shares above are all quite resilient in this regard.
Attractive valuations
Finally, a key part of Smith’s investment strategy is not overpaying for a stock. Like Buffett, he understands that valuation is important. That said, Smith doesn’t obsess over a stock’s valuation. He says that investing in good companies is far more important than finding cheap shares.
Finding the best UK shares
I think this approach to investing can help you find the best UK shares. By focusing on highly-profitable, resilient companies that have strong competitive advantages, you’ll give yourself a good chance of making money from the stock market.
If you’re looking for investment ideas, the free report below could be a good place to start your research.