With a potential global recession looming, the stock market has had a tumultuous few months. I think this volatility offers the perfect entry point to buying cheap UK shares.
Low-level investor sentiment and current market correction makes for a great opportunity to find undervalued companies to invest in. When I’m building my portfolio, I’m looking for companies that are able to weather short-term problems such as rising inflation and ultimately produce long-term gains.
If I had £1,000 spare this September, I would invest £500 across two cheap UK shares – one in the retail industry and the other in defence. Let’s take a look at them.
Retail
British retail has had a tough time in recent years. Not only were plenty of businesses forced to shut during Covid-19, but since reopening many have struggled given the rising costs of running a business and consumers spending less due to a rise in the cost of living.
One company I think could bounce back is WH Smith (LSE: SMWH). Down just over 6% in the last year, I believe that the current price of 1,466p looks like an attractive entry point.
To see how the company might perform in the long term, I’m looking at data from the travel industry as a large part of WH Smith’s revenue comes from its airport outlets.
In June, WH Smith said the travel division was performing particularly well, so much so that full-year results are now set to be “at the higher end of analysts’ expectations”.
As international travel continues to recover, WH Smith’s airport footfall will increase and this could lead to potential expansion – something the company is already looking into after the success of its Chicago and Las Vegas airport stores.
Of course, WH Smith’s success relies on a strong global economy and is extremely dependent on the travel sector, an industry that has seen much uncertainty recently given problems such as staff shortages.
A potential decrease in winter holiday-goers could also prolong WH Smith’s recovery as its airport revenues are likely to be lower than anticipated, at least in the short term.
Defence
The other stock I would invest £500 in is one of the UK’s largest defence contractors, QinetiQ (LSE:QQ).
The FTSE 250 stock is up 23.16% year to date, partly driven by the increase in military spending following Russia’s invasion of Ukraine.
I believe the stock could go up further in the coming years given the new Prime Minister’s pledge to increase defence spending to total 3% of GDP by 2030. Other countries such as those that are NATO members may increase spending in this area given growing geopolitical tensions and threats.
QinetiQ reported strong Q1 earnings recently. It has a cash position of £225m, and during its results the company said it predicts “mid-single digit organic revenue growth”, which is impressively high for a UK company in this sector.
73% of QinetiQ’s revenue comes from the UK government, meaning the company is over-reliant on the government’s funding and contracts. If defence spending is cut in coming years, which is a possibility given the current economic climate, then the stock may not see the current growth levels it predicts.