With the FTSE 250 down over 20% since the start of the year, investing in the stock market is looking quite enticing now that prices look so cheap. That doesn’t mean every hammered business will make a full recovery. After all, the economic conditions plaguing the market do have a significant adverse impact on some companies and industries.
So the question is, what are the best UK shares to buy now?
Finding buying opportunities and avoiding value traps
Historically, plenty of businesses have found ways to adapt to high inflationary environments and continue to expand operations. But the subsequent rise of interest rates is what seems to trip up most UK shares that find themselves in this type of situation.
The higher cost of debt makes securing additional loans more challenging and expensive. Sadly, this also drives up the cost of using equity to raise capital. Therefore, with the money supply being restricted, businesses dependent on external financing could soon find themselves in a world of trouble.
However, there are some exceptions. A high debt balance isn’t desirable in our current environment. Yet, for firms generating plenty of cash flow to absorb the cost of higher interest, I see little reason to panic. After all, used correctly, debt can be a powerful tool to fuel growth.
One FTSE 100 stock that doesn’t meet these criteria in my mind would be Cineworld. Shares are down 70% over the last 12 months. And there is understandable hope for a recovery now that cinemas have reopened and studios are releasing a tightly packed schedule of films.
However, in my opinion, this is a full-blown value trap. With $9.23bn of debt equivalents on its balance sheet, returning to pre-pandemic levels of profitability will simply be insufficient to cover interest expenses, let alone generate any profit.
Is this one of the best UK shares to buy now?
If I’m looking for minimal debt and an abundance of cash flows, which company is the best one to invest in today? Well, for my personal portfolio, I’ve got my eyes on Somero Enterprises (LSE:SOM). The group operates within the United States and designs concrete-laying screed machines.
It’s certainly not the most exciting organisation out there. But with more than $1trn of capital being injected into renewing American infrastructure, management has had little trouble finding growth opportunities.
Shares of the UK-listed business are down 20% over the last 12 months. That certainly seems strange when looking at the latest results. Revenue in 2021 grew at a record 51%, reaching $133.3m, while operating cash flows climbed 21% to $36.9m. And, best of all, the firm is entirely debt free, operating at a pre-tax profit margin of 33.5%!
Like any investment, there are risks. And in the case of Somero, it’s quite vulnerable to the weather. As concrete can’t be laid while it’s raining, heavy storms can disrupt projects resulting in delayed income. In fact, that’s exactly what happened in 2019. And with climate change becoming an ever-present threat, future performance might be a bit lumpy.
Yet, given its solid balance sheet, substantial cash flows, and proven business model, I feel this is still one of the best UK shares to buy now.