If I had a lump sum of £10k to invest today, I’d buy cheap UK shares. This might seem like a risky prospect. After all, the outlook for the UK economy is highly uncertain in the short term.
However, research shows that the best time to buy stocks is when they’re trading at low levels. Analysis suggests this approach can achieve high returns in the long term.
As such, I’d look past the short-term headwinds facing the UK economy and focus on the long term instead.
Cheap UK shares to buy
Based on the above, I’m looking for companies that appear to be well-placed to succeed in the long term no matter what. One of the businesses that fit into this bracket in my view is power plant owner-operator Drax.
It’s fair to say that the UK will always need electricity and Drax is one of the country’s largest power suppliers. The company has recently been converting its old carbon-intensive coal and gas power plants into cleaner bio-fuel-powered facilities. This should ensure the business remains relevant as the UK moves onto a more sustainable energy footing.
Another organisation that’s changing with the times to remain relevant is bus and train operator FirstGroup. This company has suffered significantly in the pandemic with government advice to avoid public transport sending passenger numbers and revenue plunging.
Nevertheless, I firmly believe that if the country is going to meet its long-term pollution targets, public transport will play a key role. FirstGroup has been preparing its fleet by investing in green vehicles. As such, I believe this stock could produce high total long-term returns for investors as it profits from the above themes.
Short-term headwinds
Many cheap UK shares are currently facing short-term headwinds. If companies can manage these challenges, I reckon they could see substantial growth in the years ahead.
One such business is Marks & Spencer. The retail giant has used the Covid-19 crisis to instigate some significant changes. The group has shut stores, cut costs and put more capital into it online operation. I think these reforms are long overdue, which is why I’ve turned positive on the business in the long run. Management’s efforts to change the company to cope with Coivd-19 could help propel the stock higher over the next few years.
I think Capita Group is in the same position. A string of government contracts has helped the stricken outsourcer improve its balance sheet and operating performance this year. If management can build on this progress in the next few years, I reckon the stock could be a winner. If owned as part of a basket of other cheap UK shares, I think investors could see large total returns.