Here is why the investment case and share price for each attracted me.

Direct Line

For most people, the financial services company Direct Line (LSE: DLG) needs little introduction. Its iconic red telephone logo is ingrained in the mind of millions.

That is good for the business: it currently has over 9m insurance policies in force. I like the economics of the general insurance business in which Direct Line competes. Demand for lines such as home and motor insurance tends to be resilient; motor insurance is mandated by law for most vehicles. If an underwriter has sufficient volume, it can usually predict claims volume as a percentage of policies and price its services accordingly.

That helps explain why Direct Line is profitable. It has a juicy 11.2% yield to boot. That has risen thanks to a 30% fall in its share price over the past 12 months.

Car price inflation hurting profit margins concerns investors. A fall in the number of policies in force also threatens sales and profits. But as a long-term investor, I hope Direct Line can overcome such difficulties and let its underlying business model help it perform well.

Dunelm

I owned homeware retailer Dunelm (LSE: DNLM) at the start of October.

The shares have fallen a third in the past year. Perhaps that is explained by investor concerns that consumers with less spare money will cut back on purchases for the home, hurting sales and profits at Dunelm. Revenue in the most recent quarter declined 8% compared to the same period a year ago. Gross margins also fell, which could be bad for profitability.

But Dunelm is a quality operator with a proven business model. It has maintained its guidance for the full financial year, of profit before tax in line with analysts’ expectations of £130m-£193m. That would be a decline from last year’s record results but still solidly profitable. A price-to-earnings (P/E) ratio of just 10 looks attractive to me. I bought more of these FTSE 250 shares this month.

ITV

What is the future for traditional television companies?

Maybe it is continuing to run old school operations, which can still throw off large advertising revenues. Perhaps it is utilising decades of expertise to expand business by producing content, both for themselves and other media properties. It could also be moving into the digital arena.

The UK broadcaster ITV (LSE: ITV) is doing all three. The FTSE 250 company remains solidly profitable, making more than a million pounds a day on average last year in pre-tax profit. The City seems not to like the company’s strategy, though, with ITV shares falling 36% in the past year.

I do think an advertising downturn could hurt revenues and profits at ITV. But the P/E ratio of under five, combined with a prospective dividend yield of almost 8% based on management guidance, make the shares very attractive to me. I increased my holding this month.

Stable legs

The retailer’s latest trading numbers were slightly disappointing. Sales figures saw an accelerated drop since the company’s last quarter. On a year-on-year basis, total sales went from a 6% fall in Q4 to a drop of 8% this quarter. Additionally, gross margins saw a 1.3% decline. However, it’s worth noting that these figures were still largely in line with analysts’ expectations, which is why Dunelm shares are largely unmoved.

That being said, I should point out that this year’s numbers are being compared to a very strong previous year. Nonetheless, when compared to pre-pandemic sales figures, Dunelm sales are actually up 36%. This shows the company’s strength, and that it can hold on to customers despite challenging times.

Silver linings

There were some plus points within its gloomy sales numbers, however. For one, Dunelm said its full-year outlook remains in line with what it shared last month. This comes at a time when other retailers are downgrading guidance. The board also mentioned that it’s well hedged for its full year, despite a weaker pound.

Moreover, management mentioned that it continues to see robust sales across its retail channels and all categories. More importantly, it’s been seeing “a very good response” to its seasonal ranges from customers.

Furthermore, Dunelm’s performance has fared relatively well against the rest of the industry. There’s no doubt that the home improvement sector has taken a hit given the current recessionary backdrop. Data since April indicate that household goods stores have been underperforming 2019 levels. But when comparing these to the figures Dunelm shared, it’s safe to say that the company has been doing fairly well, given how far ahead it is of pre-pandemic levels. This supports CEO Nick Wilkinson’s view that the business is delivering good value to customers.

Planning an exit

Even so, will I be still be buying Dunelm shares? Well, the company has a decent balance sheet with a healthy debt-to-equity ratio of 29.6%, showing that it has solid foundation to weather a recession. Nevertheless, its cash and equivalents (£30.2m) aren’t sufficient to cover its debt (£52.8m), and is something worth noting.

Having said that, I’m still not convinced of its growth prospects. Given the current macroeconomic environment, Dunelm isn’t going to expand its market share by a huge margin any time soon. Its focus for now has to be on maintaining its customer base and healthy margins.

On top of that, the latest price targets from JP Morgan and Barclays indicate that Dunelm shares have limited upside too, as both banks have a price target of £7.61. I’m a buy-and-hold investor, but with its current share price at £7.89, I’m planning to exit my position and take profits before further headwinds bring its share price lower. To conclude, I believe there are better stocks in more robust industries to invest my cash in for the long term.

Home furnishings

Dunelm is a home furnishing retailer with an online presence, as well as 80 locations throughout the UK. Its stores are primarily larger out-of-town sites located in retail parks. It is best known for its textile products such as custom-made curtains, bed linens, cushions, and more. It also sells other furniture such as wardrobes, cupboards, tables, and so on.

So what’s the current state of play with Dunelm shares? At present, they’re trading for 770p. At this time last year, the stock was trading for 1,232p. This is a decline of 37.5% over a 12-month period.

UK shares have risks

Due to recent volatility, as well as the tragic events in Ukraine, Dunelm shares have come under pressure. Some of the headwinds include soaring inflation, the rising cost of raw materials, as well a global supply chain crisis.

All of these aspects threaten Dunelm’s shorter-term investment viability. Rising costs could put pressure on profit margins, as well as levels of return. The supply chain crisis may see its ability to offer certain products dwindle, in turn, negatively impacting sales and performance.

These headwinds have also created a cost-of-living crisis in the UK. With that in mind, Dunelm may suffer shorter-term performance issues, as consumers may have less money to spend on furnishings, and be more inclined to spend their hard-earned cash on staples such as food and energy bills.

The positives and my verdict

So to the bull case of Dunelm shares. Firstly, I noticed that Dunelm has a good track record of past performance. In the past four fiscal years, it has grown revenue and profit for three of these years. The exception was 2020, when its physical stores were shut for a long period due to restrictions linked to the pandemic. What pleases me in particular is the fact that 2022 performance has surpassed pre-pandemic performance by some margin.

As Dunelm has been performing well, it has been able to reward shareholders in the form of dividends. With the share price falling, its dividend yield has inflated somewhat, and currently stands at close to 9%. I am conscious that dividends are never guaranteed, and can be cancelled in times of volatility to conserve cash.

Finally, Dunelm is one of a number of UK shares trading at bargain levels. As I write, the shares are trading on a price-to-earnings ratio of just nine.

To summarise, I believe Dunelm could suffer a little bit in the short term, but, in the longer term continue its impressive growth trajectory, and performance levels too. This should provide consistent returns, and boost the share price upwards, in my opinion.

The fact that the shares are trading cheaply currently is a bonus and what caught my eye originally. I will place Dunelm shares on my buy list for when I next have some funds to invest.

But plenty of shares are down. And I think it’s made a lot of attractive ones look even more tempting. Here are three that look like better buys to me.

Pillows to cry on

Home furnishings provider Dunelm Group (LSE: DNLM) did well during the pandemic. When it was harder to move house, or even to go shopping for home improvement items, online sales saw big benefits.

That effect has pretty much faded and the share price is back down close to its long-term trend. But could a new squeeze on mortgages lead more people to buy stuff at Dunelm instead of trying to move house?

Investors didn’t seem to think so Wednesday, pushing the Dunelm share price down another 4% by the afternoon. But that’s dropped the stock’s trailing price-to-earnings (P/E) ratio down to 8.6. And it’s boosted the forecast dividend yield above 5%.

There will be uncertainty over that dividend now, and I expect more short-term pain. But I think Dunelm looks like a good one for investors to buy for the long term.

Investors fleeing

The financial sector has taken a battering, and that includes investment manager M&G (MNG). It’s not surprising, as investors withdraw funds to invest in things they consider safer.

I expect short-term pain here again, following an 8% share price fall on Wednesday. And there could well be further declines to come as we head into a gloomy financial winter.

But what about the long term? I reckon all those investors will return when the storm clouds start clearing, shovelling their cash back into investment managers’ hands. It happens every time there’s a stock market slump followed by a recovery. And I don’t know any stock market slump yet that hasn’t recovered.

So yes, I see M&G as a good long-term investment. It might, however, get even cheaper in the coming months.

Drowning sorrows

J D Weatherspoon (LSE: JDW) shares fell 6.5% on Wednesday, tumbling to a 12-month loss of more than 60%.

The pub chain is due to deliver full-year results on 7 October. And it’s not set to be a good year, as the hospitality business is still rebuilding after its pandemic hammering. We should see a second year of losses this year.

But forecasts indicate a return to profit in 2023, with a fairly undemanding forward P/E of around 13. There’s some earnings growth on the cards for 2024 too. These are tentative forecasts, and I think Wetherspoon could be the riskiest of the three stocks here.

But I can’t help seeing a decent stock market recovery candidate here. I mean, Brits and booze, we kind of go together, don’t we? It’s a bit like Americans and incomprehensible sports — though I probably shouldn’t say that, in case anyone mentions cricket.

Building

That’s what makes Vistry Group (LSE: VTY) look so attractive to me. The housebuilder, formerly known as Bovis Homes, will release first-half results on 8 September. The Vistry share price has been on a slide, along with the whole sector.

That share price weakness has helped push the forecast dividend yield up close to 10%, and has dropped the price-to-earnings (P/E) multiple on the stock to under six.

A lot will depend on how the property market holds up in the second half. But housebuilders that have reported so far have shown strong first-half business.

House prices in August were up 10% year-on-year, though that will surely slow.

DIY

Kingfisher (LSE: KGF) dividend forecasts suggest a yield of above 5%, which is not the biggest around. But I do like one thing about it. The dividend is growing as the share price falls.

Since slashing the dividend in response to the pandemic, Kingfisher has been rebuilding it. And for the year ended January, at 12.4p per share it already exceeded pre-pandemic levels.

What’s more, the cash was covered almost three times by earnings. Forecasts predict a modest increase over the subsequent two years. But in the current economic climate, I think any dividend rise is good news.

The company, which owns DIY chain B&Q among other retail businesses, is currently returning capital to shareholders through a share buyback programme. To me, that bodes well for its dividend prospects.

Soft things

We’ve seen another dividend recovery at Dunelm Group (LSE: DNLM), following a pandemic suspension. And again, a falling share price has helped strengthen prospective yields.

Dunelm is due to deliver full-year results on 14 September. And the home furnishings retailer has already told us of a 16% rise in sales. Digital sales, at 35% of the total, are down 11 percentage points from the year before.

So we’re seeing a weakening of the pandemic effect. But it’s still interesting to see such a high percentage for products that people traditionally like to touch and feel before buying.

Dunelm lifted its interim dividend by 17%. The same rise in the final dividend would yield 6%.

Dividends

Dividend forecasts are at best a vague indicator of the cash we might get. And I’ve seen analysts doggedly sticking to obviously unrealistic forecasts, long after investors could see they weren’t going to happen.

So I treat them with a good deal of caution. And what I want to see most is signs that a forecast might be realistic, rather than the forecast itself. We’ll know Dunelm’s for sure in September. And for the other two, I’ll be looking for evidence of strong and growing cash flow.

Here are a couple of examples of shares trading at just such a discount, that I would consider adding to my ISA in September.

Dunelm

Shares in homewares retailer Dunelm (LSE: DNLM) have lost close to half their value in the past year, falling 45% in that period. But why?

Clearly there are worries among investors about risks, such as falling consumer spending leading to lower revenues for retailers. A lot of home decoration is seen as discretionary. So as household budgets tighten, it may be paused in favour of paying for everyday necessities such as food and energy.

I am not sure that will happen though. Dunelm has some very cheap products that might be just what shoppers want to cheer themselves up when times are tough.

I also think the sheer quality of this company makes it stand out to me as an investor. It grew sales last year by 16% and sales are now 40% higher than they were before the pandemic. The company has a track record of growing its market share, meaning it should be able to improve sales even when market demand overall is flat.

The company is also free of debt, giving it an enviable balance sheet going into a recession. It also offers a 5% yield. Despite these attractive financial qualities, Dunelm shares now trade on a price-to-earnings ratio of less than 10.

These look like bargain UK shares to buy now and hold in my portfolio – which is what I am doing. I have already bought some Dunelm shares and I am considering purchasing more in September.

Direct Line

Another company that has seen its share price tumble in the past year is insurer Direct Line (LSE: DLG). The shares are trading 32% lower than they were 12 months ago.

There are some reasons for that. Soaring second-hand car prices threaten to make the insurance business less profitable than it was before. New rules on renewal pricing that were introduced this year could also lead to profit margins falling at insurers.

But insurance is an enduring business that I expect to benefit from strong ongoing demand. Insurers are expert at matching their pricing to what the market can tolerate, so I expect Direct Line to remain profitable.

Even though profits declined 32% in the first half compared to the same period last year, Direct Line still earned £178m across six months — almost a cool million pounds each day. That helps fund a big dividend, with the yield currently sitting at a tempting 10.8%.

The company has strong customer awareness and over 13m policyholders. That could set the foundation for ongoing profits. I am optimistic about the long-term outlook for Direct Line, despite the share price fall. If I had spare cash to invest and was looking for UK shares to buy now, this is one of the companies I would consider.

In both cases, I bought more shares to add to existing holdings. Today, I want to explain why I’m excited enough about these companies to invest — despite the uncertain economic outlook.

A top family retailer

My first buy was retailer Dunelm Group (LSE: DNLM). This FTSE 250 business is well known for its wide range of affordable homewares. Dunelm is also expanding into the furniture market. The company recently opened a new warehouse to support this side of the business.

Trading boomed during the pandemic, as locked-down shoppers updated their homes. Dunelm’s share price also boomed, hitting record highs of almost 1,500p.

The stock has since fallen by more than 50%, to around 700p. That’s left Dunelm trading on around 10 times 2022/23 forecast earnings, with a potential 6% dividend yield.

City analysts have already factored in a fall in profits next year. However, the big risk is that a UK recession could be longer and deeper than expected. That could result in a much sharper fall in sales.

I can’t rule out this risk. But Dunelm has several qualities that mean I think this business will recover strongly and return to growth.

3 reasons why I’ve bought

Dunelm has strong finances with minimal debt. The group generates plenty of cash and has high profit margins — around 13% at last count. This should mean that any short-term slump in sales will be manageable.

Secondly, the founding Adderley family still own more than 40% of Dunelm shares. My experience is that family-controlled businesses tend to be run for the long term, to protect the family’s assets (and income). As a long-term investor, that’s what I want too.

Finally, I’m impressed that Dunelm has managed to recruit Alison Brittain to be its new chair. Brittain has a strong track record as CEO at FTSE 100 firm Whitbread (which owns Premier Inn).

On balance, I think Dunelm’s share price slump is offering investors a chance to profit from future growth. That’s why I bought more Dunelm shares in August.

A leading global business

Rising energy prices and supply chain problems have become everyday complaints over the last couple of years. To increase my exposure to energy and shipping without investing directly in these sectors, I’ve been buying shares in Clarkson (LSE: CKN).

This FTSE 250 firm was founded more than 170 years ago and is now the world’s leading shipbroker and shipping services business. Clarkson is active in sectors including oil and gas, renewables, dry bulk (e.g. grain) and container shipping.

Recent trading has been strong. I think this is likely to continue, given the uncertain and changing conditions in global energy markets.

One concern is that a major global recession could see shipping demand fall. That could hit profits.

However, Clarkson says that a “structural supply shortage in the global shipping fleet” is expected to keep shipping rates and ship prices high. High commodity prices also tend to be good for shipping.

Clarkson shares have fallen by around 25% from their pandemic highs. This FTSE 250 stock looks decent value to me at current levels.

Rolls-Royce

Rolls-Royce (LSE: RR) is a British multinational aerospace and defence holdings company. It is one of the world’s largest makers of aircraft engines, and operates in four different segments. These include civil aerospace, power systems, defence, and new markets.

After a disappointing set of H1 results, Rolls-Royce shares saw yet another decline. But this week, a number of director dealings were carried out. Most notably, there was a huge purchase of shares from Chairwoman Anita Frew. The purchase from such a senior director should improve sentiment surrounding the stock.

• Name: Anita Frew
• Position of director: Chairwoman
• Nature of transaction: Purchase of shares
• Date of transaction: 5 August 2022
• Amount bought: 50,000 @ £0.83
• Total value: £41,300

• Name: Lee Hsien Yang
• Position of director: Non-Executive Director
• Nature of transaction: Share purchase plan
• Date of transaction: 8 August 2022
• Amount bought: 1,161 @ £0.84
• Total value: £980.23

• Name: Wendy Mars
• Position of director: Non-Executive Director
• Nature of transaction: Share purchase plan
• Date of transaction: 8 August 2022
• Amount bought: 2,156 @ £0.84
• Total value: £1,820.31

• Name: Sarah Armstrong
• Position of director: Chief People Officer
• Nature of transaction: Share purchase plan
• Date of transaction: 9 August 2022
• Amount bought: 175 @ £0.86
• Total value: £149.84

• Name: Rob Watson
• Position of director: President (Rolls-Royce Electrical)
• Nature of transaction: Share purchase plan
• Date of transaction: 9 August 2022
• Amount bought: 175 @ £0.86
• Total value: £149.84

Admiral

Admiral (LSE: ADM) is a British-based insurance company. It specialises in car insurance products, but also has a line of other offerings. These include home insurance, travel insurance, pet insurance, and van insurance.

The FTSE 100 firm released its H1 results earlier this week. Although profits slumped by almost half, the stock still shot up by 15% this week. This was most likely due to the announced special dividend of 15.8p. This would bring its total dividend to 60.0p per share. Investor sentiment was also further boosted when the Chairwoman purchased shares worth over £25,000.

• Name: Annette Court
• Position of director: Chairwoman
• Nature of transaction: Share purchase plan
• Date of transaction: 11 August 2022
• Amount bought: 1,181 @ £22.44
• Total value: £26,501.64

Dunelm

Dunelm (LSE: DNLM) is one of Britain’s biggest home furnishings retailers with an ever-growing market share. It operates over a 170 stores throughout the UK and offers over 50,000 products across a broad range of categories.

The FTSE 250 firm released its Q4 trading update not too long ago, and the interim numbers resonated well with investors. Nevertheless, its bottom line figure is yet to be released, and investors are wondering whether their expectations will be met. Therefore, the recent purchases by its CFO and another director could be an indicator of an earnings beat. The company is expected to report its official FY22 results in less than a month’s time.

• Name: Vijay Talwar
• Position of director: Non-Executive Director
• Nature of transaction: Purchase of shares
• Date of transaction: 4 August 2022
• Amount bought: 9,670 @ £8.50
• Total value: £82,156.32

• Name: Karen Witts
• Position of director: Chief Financial Officer
• Nature of transaction: Purchase of shares
• Date of transaction: 5 August 2022
• Amount bought: 1,174 @ £8.45
• Total value: £9,922.18

Types of shares

To provide context, there are a few types of shares that can be purchased by directors. Some directors opt to purchase shares via the open market. Having said that, directors also have the option to purchase shares via a share incentive plan (SIP).

A SIP is an employee plan for companies within the UK to flexibly award shares to employees. Publicly listed companies normally exercise this option because it’s tax-efficient for both the employer and its employees.

In this week’s set of director dealings, a certain number of directors opted to purchase shares via their companies’ share purchase plans. This allows employees to purchase shares through automatic deductions from their pay. And this was the case with a number of Rolls-Royce directors, as well as Admiral’s Chairwoman.

That wide difference is largely due to their composition. The FTSE 100 holds several energy and defensive companies, both of which have performed well.

Meanwhile, the FTSE 250 holds many retailers and travel shares, both of which tend to suffer in a recessionary environment.

But today, I’m looking to the future. I’m searching for shares to buy for the next bull market. Recessions come and go, but eventually growth will pick up and many shares that have performed poorly this year could do well in the coming years.

Finding the best shares

There are several factors I’d consider when looking for the best shares to buy. First, I only want to own high-quality businesses with double-digit profit margins.

Like hugely successful investor Warren Buffett, I’d also look for companies with a ‘moat’. That means they must have a competitive advantage, like a unique product or a popular brand.

Companies that are currently growing their earnings are preferable. But equally, I’d be interested in new products or services that could lead to higher sales in the future.

Balance sheet strength is important. I’d like to own companies with low levels of debt and plenty of cash flow.

FTSE 250 top pick

That leads me to companies that look well-positioned for the next bull market. At the top of my list is fantasy miniatures business Games Workshop (LSE:GAW). This is a well-run business that aims to survive forever. That long-term goal results in a conservatively managed firm that has a keen eye on longevity.

A word of warning, however. As the cost of living continues to rise, many people might find they have less spare cash to spend on hobbies like this. Rising manufacturing costs might also put some pressure on margins.

That said, it operates some strong brands and customers are unlikely to go elsewhere. Also, Games Workshop is a high-margin business, even when faced with greater costs. That’s why I’d consider buying it, and I’ve added it to my watchlist.

A star retailer

Next, I’d look at Dunelm (LSE:DNLM). This homewares retailer is growing market share ahead of its competitors. In turn, that has led to sales that are 40% higher than pre-Covid levels.

A strategy of developing its digital offering is paying off too. Digital sales are more than two-and-a-half times higher than pre-Covid levels.

But it’s never just about sales. Profits are important too. So it’s great to see that Dunelm operates with a double-digit profit margin that has gradually climbed over several years.

That said, tightening customer finances could still impact sales and profits over the coming months. How this share performs during a recession is uncertain. Also, a new CEO takes the lead early next year, which could mean further uncertainty.

Overall though, this FTSE 250 retailer looks like a quality share to me. It has a return on capital employed of over 40%, a 6% dividend yield and a price-to-earnings ratio of just 11 times. That’s a cracking combination, and I’d consider buying it this year.

Assura

Healthcare property landlord Assura (LSE: AGR) has several things going for it as far as I can see.

The long-term demand for healthcare is likely to be resilient, which means lots of buildings such as GP surgeries and ambulance depots are still needed. The sorts of tenants that rent those premises often do so for decades on end and can be relied upon to pay their bills. That compares favourably to the scrappier end of the commercial property market.

That helps Assura to generate substantial and fairly predictable cash flows, which in turn can fund dividends. At the moment, the dividend yield on offer is 4.4%. I think that is attractive. I also like the group’s valuation. Its price-to-earnings ratio of 12 looks like fair value to me for a quality business.

What could happen to change my analysis? One risk I see is the political risk of price capping for service providers to the NHS. Even without that, the politically sensitive nature of the sector could limit the profits to be made. But Assura’s large and growing estate looks set to be a long-term money spinner to me. That is why I would consider adding the shares to my portfolio.

Dunelm

Like Assura, Dunelm (LSE: DNLM) is a member of the FTSE 250 index. But unlike Assura, its name is known to millions of people as it has a nationwide chain of homeware stores.

Is now a good time to be in homewares, given the risk that consumer belt tightening could mean less money is spent on home decoration? Obviously some investors are sceptical. That risk helps explain why the shares have plummeted 35% over the past year.

But I think a recession may actually turn out to help sales at Dunelm. It stocks a wide range of items including some at low prices could help it attract new shoppers. Inflation may eat into profit margins, although for now at least the business seems confident it can manage rising prices without hurting profitability.

The shares yield 4%. The dividend is comfortably covered and the company balance sheet looks healthy to me. At the time of its interim results, the company was sitting on net cash of £48m. Free cash flow of £106m in the first half underlined what I see as the attractiveness of Dunelm’s business model. I own the shares in my portfolio and would consider buying more in August.

Buying FTSE shares this summer to hold for years

Both of these FTSE 250 shares strike me as attractive options to add to my portfolio for the long term.

I expect more economic doom and gloom may emerge over the summer, which could offer me an even lower price to buy these two shares. But I already think they offer me attractive long-term value. I like their cash generative business models and would happily buy both.