I am always on the lookout for cheap UK shares to add to my portfolio. When scouring for bargains, however, I don’t just buy shares based solely on the fact that they have an ultra-low price-to-earnings ratio. Often, such companies are cheap for a reason, e.g., they have uncertain future cash flows or they are in an industry that is in a long-term decline.
When bargain hunting, I always remember the words of Warren Buffett: “Price is what you pay, value is what you get”. I believe these two UK shares fit this definition perfectly and are trading at less than their intrinsic value.
Shell
Until recently, oil and gas major Shell (LSE: RDSB) had definitely fallen out of favour with the market. The reasons for this are well documented. Firstly, activist investors and big investment funds continue to demand that Shell accelerates its move away from oil and gas. Secondly, the company lost credibility when it slashed its dividend in 2020 by 66% for first time since WWII.
Although the Shell share price has doubled from its pandemic lows, it still looks incredibly cheap. The soaring price of oil is the primary reason why it has done so well recently. But as a potential buyer, what is far more important to realise is how structural changes in the economy will power this warhorse into the near future.
Rising inflation and under-investment in the natural resources sector are the catalysts for Shell’s near-term growth potential. Indeed, I believe we have a set up very akin to the 1973 oil embargo, when rising inflation and a shortage of oil caused prices to spike.
Of course, there are risks to Shell. If oil prices continue to surge beyond $100 a barrel, then demand will undoubtedly be hit, particularly if a recession follows. In addition, its long-term future is in doubt as the world moves away from fossil fuels. Despite these risks, I would still add it to my portfolio today.
Fresnillo
Precious metals miner, Fresnillo (LSE: FRES), has had a terrible time lately. The share price has declined 50% over the past year. On Wednesday, it tanked 14% when it warned of a slump in production in 2022 due to the introduction of new labour laws in Mexico (where its mines operate).
I believe the sell-off in the world’s largest silver producer (together with significant gold deposits too) was overdone.
There are three reasons why I think silver is a great play in the current environment:
- Silver (together with gold) is the perfect hedge against inflation. The viability of cryptocurrencies on this front have been eroded after their spectacular declines recently. I prefer owning a tangible asset with hundreds of years of history behind it.
- Silver is a very versatile metal with many industrial applications. It has uses in EVs, solar panels, and a large number of electronic applications. Demand for all of these will surge in the next decade.
- Silver is a monetary metal. Its price rise during the Covid recession demonstrates this point well.
Investing in individual miners is a risky business given the very nature of the mining industry. Therefore, share price volatility is to be expected in the coming years. Personally, I’m comfortable accepting such risk and hold some shares of Fresnillo in my portfolio. I think they could reward me handsomely over the long term.
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Andrew Mackie owns shares in Shell and Fresnillo. The Motley Fool UK has recommended Fresnillo. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
