I’m always on the lookout for the best UK shares in which to invest. Like many investors, I have a list of criteria that I follow to aid my search.
The checklist
This is what I’m looking for from my share picks:
- Earnings growth: I think the best UK shares display this. Ideally, I want the company to grow its sales and profits by over 10% a year.
- Liquidity: I want to see a well-financed business and a strong balance sheet. I like to see a positive cash position and little or no debt.
- Competitive advantage: I think the best UK shares are those that have a sustainable competitive advantage. For instance, this could be in the form of superior technology or a strong brand.
- Return on capital: this is a measure of quality and it demonstrates how efficiently a company makes money from its capital. I like to see a return on capital figure of over 15%. The higher the better.
- Director ownership: I like to see company management owning a large chunk of its shares. This demonstrates ‘skin-in-the-game’ and aligns directors with shareholder interests.
The UK shares I’d buy today
If I had £5,000 to invest in the best UK shares right now, I’d follow my checklist to narrow down my search. There are thousands of available UK shares on the London Stock Exchange. With £5,000, it’s not practical to invest in too many, so I’d pick just two.
Right now, I reckon the best UK shares include Boohoo (LSE:BOO) and Luceco (LSE:LUCE). Both of these companies seem to meet my checklist criteria.
Ticking the boxes
Online fashion retailer Boohoo is forecast to grow earnings by 35% and I already hold some of its shares. It has no debt and a strong balance sheet. This fast-fashion company owns popular brands including PrettyLittleThing and Karen Millen.
Recently, it bought several brands, including Debenhams. It meets my ‘quality stock’ criteria, offering an excellent 25% return on capital. Lastly, I like that Boohoo’s chairman still owns over 12% of the company.
That said, it suffered major reputational damage with a supply chain scandal last year. There could be a risk to the shares if these issues were to resurface. But I think the company is making great strides to rectify past issues and errors. And with sales still soaring, Boohoo could become a much larger business in a few years, in my opinion.
Shining shares
Luceco is another stock that meets my criteria. Since I last wrote about this cheap share in May, the price has risen by over 20%. But I think it could still be one of the best UK shares right now.
I like that its CEO owns almost 20% of its shares. I also like its double-digit returns and growing earnings. Overall, I think its LED lighting business could thrive over the coming years. In the UK, there’s a strong focus on an environmentally-friendly future. That should bode well for this energy-efficient lighting company.
That said, its business is concentrated in the UK so any economic downturn could affect its prospects. Rising raw material costs could also affect its profit margin. Overall, I think the positives outweigh the risks and I’d consider it for my portfolio.