As the US market has underperformed in 2022, UK shares have held up far better. This is mainly due to the abundance of value stocks in the UK market, which are far more resistant to rising inflation than American stocks. Therefore, I’m keen to add more home-grown shares to my portfolio. Here are two that I think have significant upside potential and would consider adding in February.
A top housebuilder
Housebuilding shares have slightly underperformed the market this year. This is due to two reasons. Firstly, higher interest rates may see reduced demand for houses because mortgages are becoming more expensive. As such, there is always the chance that the housing market may see a large correction. In a worst-case scenario, there could be a crash. Furthermore, the government has announced that housebuilders should meet the costs of rectifying cladding on high-rise blocks, which could cost as much as £4bn. Despite these risks, I feel that Bellway (LSE: BWY), which is down nearly 13% over the past six months, has the potential to recover these losses.
Indeed, today’s trading update was excellent, and it stated that both market conditions and consumer confidence were “strong”. This meant that the company was able to reinstate its target of delivering volume growth of 10% and delivering over 11,100 homes for this financial year. The forward order book also looked good, as underlying demand for new housing showed no signs of slowing. In fact, the company’s forward order book is 12.5% higher than last year, at 6,628 homes.
Finally, I am also extremely impressed by company’s operating margins, which should be above 18% for the full year. This is slightly higher than the 17% recorded in the last financial year. This demonstrates that the company is coping well with inflationary pressures. For these reasons, I feel that this UK share is a ‘no-brainer’ buy for me, which should see growth over the next few years.
Another high-quality UK share
Diageo (LSE: DGE) has outperformed the FTSE 100 year-on-year, thanks to its reputation for excellence and brand loyalty. Indeed, the drinks giant has a portfolio of over 200 different brands, ranging from Guinness to Baileys. Such a large portfolio helped the company continue to record big profits during the pandemic, and it has continued to see growth since.
In its recent half-year results, Diageo reported net sales of £8bn and operating profits of £2.7bn. These figures represented a rise of 20% and 24.7% year-on-year respectively. Due to such strong results, the drinks giant was also able to raise the interim dividend by 5% and continue its £4.5bn share buyback programme. Although a dividend yield of 2% is fairly insignificant compared to some other UK shares, it’s both extremely sustainable and growing.
There are some risks related to the shares, however. For example, the company has a price-to-earnings ratio of over 20. This indicates that strong growth is expected over the next few years. If there is any slowdown, or a failure to meet such high expectations, the Diageo share price could plunge as a result. The effects of inflation may also strain profit margins.
Even so, I’m confident that the excellent set of brands owned by Diageo will continue to attract significant consumer loyalty. Hopefully, this will allow further growth and offset any negative impacts of inflation. This is a UK share I’ll continue to add to my portfolio.