There’s a chronic shortage of homes for both buyers and renters today. It’s a problem that will likely take years to resolve given that home construction rates continue to lag breakneck demand. This is why professional residential landlord Grainger (LSE: GRG) could be one of the best UK shares to buy today. The property stock is the biggest operator in its field: it had 9,727 homes on its books as of September.

Grainger’s profits are at risk from changing regulations related to the rentals market. However, I think the breakneck momentum of rent rises in Britain still makes it a stock that’s too good for me to miss. According to the Royal Institute of Chartered Surveyors (RICS) its members expect rents to grow 5% a year over the next half a decade.

What’s more, I like Grainger’s plans to capitalise on this fertile environment to maximum effect. Its property pipeline (which stood at 8,373 homes in September) should more than double its net rental income.

A UK share in great shape

Huge uncertainty hangs over the global economy as inflation soars, Covid-19 drags on and the tragic war in Ukraine continues. I think buying some UK healthcare shares is a good idea in this landscape. Spending on medical care is one of the last things we tend to cut back on when times get tough.

Private hospital operator Spire Healthcare (LSE: SPI) is one stock I’m considering buying today. This is because NHS waiting lists are rocketing and an increasing number of people paying for treatment as a result. Revenues at Spire leapt 20.3% year-on-year in 2021 (and jumped 12.8% on a two-year basis) as private patient numbers rose by record levels.

The problems in the NHS look set to worsen before they get better too, meaning that trading at Spire should remain robust. Analysis of NHS data by The Guardian newspaper shows that the number of British people waiting for cancer treatment now sits at all-time highs. I’d buy the business even though changing health policy could damage demand for its private care.

A FTSE 100 favourite

Regulations are getting tougher for gambling companies as the government addresses the problem of addiction. The results of a major review into UK gambling laws are due in the coming weeks. And this has the potential throw up some serious problems for operators like Entain (LSE: GVC).

However, I think the dangers of me owning this particular stock could be baked into its current share price. Today Entain trades on a forward price-to-earnings growth (PEG) ratio of 0.2. This is comfortably inside the threshold of 1 and below that suggests a stock could be undervalued.

I believe Entain — the owner of popular gaming brands like bwin, Ladbrokes and partypoker — could be a great UK share to buy as online gambling continues to take off. Indeed, annual online net gaming revenues at Entain soared a further 12% in 2021. This was the ninth successive year of double-digit growth at the FTSE 100 firm.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

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A big danger for investors is what are known as ‘value trap’ companies. As the name suggests, these are shares that look cheap, so seem to offer good value. But in fact they end up falling to an even cheaper price and sometimes to zero. Often that is because a company’s business prospects are changing, or its dividend policy has fallen out of step with its ability to generate spare cash.

Here are four red flags I pay attention to when trying to spot value trap companies. If I think a company might be a value trap, I can avoid investing in it.

1. Free cash flow consistently below dividends

As an investor, it is a big mistake to think that company accounts are too boring or complicated to be worth reading. They are a vital source of information.

To pay dividends, a company basically needs to have more hard cash coming in the door than going out. Often investors just look at a company’s ‘earnings‘. Earnings can be a very helpful measure to assess a company’s financial health. But they may be quite different to cash flows. That is because companies sometimes book earnings or costs at a different time than they see any cash impact from them.

Cash flows can swing about a lot even in a stable business. For example, paying for a new factory or office building could mean a big hit to cash flow. So, I focus on what is known as ‘free cash flow’ – basically the excess cash a company generates (or spends) once it has paid for everything such as operating costs and finance costs.

By looking at this over a period of a few years, it is less likely to be affected by short-term swings. It is more likely to reflect the long-term cash generation ability of the company. One key point, though, is that such information is backwards-facing. When assessing a company for my portfolio, I want to judge its future prospects. So I will look at things that could hurt free cash flow, such as a likely fall in sales or large debt repayment that will fall due in the future.

2. Value trap companies and unstable business prospects

Some companies have certain limitations on their future ability to earn money. As the risk of this increases, often the share price will fall so the dividend yield will increase. Looking back, the company may seem to have a solid performance record. But looking forward (which is what an investor needs to do), it might be a very different story.

An example of this is BP Prudhoe Bay Royalty Trust. At first glance, this share may look like it pays out dividends based on the current oil price. With energy prices soaring, that helps explain why the shares have risen 161% this year and 150% over the past 12 months.

But on closer examination, the reality is more complicated than a dividend linked to oil prices alone. In fact, the company’s trust deed contains a couple of vital clauses that could decimate long-term returns. One says that, if the trust goes two years without paying dividends, it will be terminated. Another sets out a formula to help calculate dividends, indeed based on oil prices. But a cost escalator in the formula basically means oil prices need to keep rising sharply over time just to keep dividends level. But sooner or later, oil prices are bound to fall.

A few years ago, many investors were attracted by the company’s attractive yield and strong dividend history. But that should have been a warning sign to research the company more carefully, in which case they would have discovered that the long-term prospects for the dividend were poor. A decade ago, its 7% yield may have looked attractive — but since then dividends have tumbled and the share price has fallen over 90%.

3. Risk profiles beyond my comfort zone or understanding

Shares in miner Evraz are up 87% in little more than a week. That may sound like it could be the opposite of a value trap! But in fact, the Evraz share price has still collapsed 83% in a year. Was it a value trap before, for example, last year? The reality is we do not know. Only in the coming months or years will it become clear whether the recent Evraz share price is a bargain.

One thing that is clear already, though, is that last year many investors were mispricing the risks that might hurt Evraz. Such mispricing of risks is quite common for investors in value trap companies. All companies have risks, but some are more obvious than others.

For example, in early 2017, construction group Carillion yielded a juicy 8%. But as Roland Head wrote back then in “Two 7%+ yielders which could prove toxic to your portfolio“, he felt the firm’s accounting practices added “a considerable amount of risk to the stock“. Within a year, the shares had collapsed to zero – a classic value trap.

4. Financial shenanigans

Free cash flow is a good indicator of a company’s ability to pay a dividend. But the accounts themselves might not always be quite what they seem. Different companies account for things with a variety of approaches.

Many value trap companies have done well previously but fallen on hard times. In such a situation, management may want to convince the market and themselves that the business is in a temporary downturn, not a terminal decline. That can sometimes lead to unusual accounting measures being used.

I look out for any financial shenanigans, whether it is unusually structured loans, dubious accounting practices or consistently paying dividends for years that do not seem to be covered by free cash flow. If a dividend yield looks too good to be true, I then dig into the accounts. If I do not like what I see – or simply struggle to understand it – I will be more concerned that the share could turn out to be a value trap.

Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

Before anything else, let me just put this out there. I am not trying to fear-monger about an impending stock market crash. I’m just trying to plan scenarios. If we are, or intend to be, investors in the stock markets for the long term, we will see the dizzying highs, the crashing lows, and everything in-between. And planning for them, in my view, could help us make the most of them. 

The reason, however, that I mention the stock market crash today is this. The markets are in a period of correction. From its highs in February, the FTSE 100 index had fallen by 10% earlier this week to sub-7,000 levels. It has recovered a bit since, but I do not think we should assume it is out of the woods. 

No ceasefire between Russia and Ukraine

The biggest reason for this is, of course, the fact that Russia’s invasion of Ukraine is still very much on. Ceasefire talks so far have yielded no results. Not only is it a tragic human crisis, it has very real economic consequences far beyond the borders of the two countries involved. 

Commodity prices rise

The most obvious of these is the rise in commodity prices. Commodities are what in economics are called ‘primary goods’, which are often raw materials used to produce other goods. So as their prices rise, so do those of everything else. This means there are second and third round effects from their increase for inflation. 

Oil prices are the most obvious and glaring example of this. This is because there are limited substitutes for oil, and it is a cost component for producing pretty much everything. Fuel prices were already spiralling upwards before the war started, and now there is a chance that they will rise even higher. This could impact companies’ financial balance sheets, their share prices, and even result in a market crash or at least an ongoing correction. 

Social unrest to stock market crash

But if we have to contend only with high inflation, even that will be relatively lucky in my opinion. From continental Europe to the Middle East, there is news about potential social unrest if day-to-day goods and services become unaffordable. And in that scenario, we could be in for a serious stock market wobble. 

What I’m doing now

But at the same time, history is testimony to the fact that the stock markets can not just survive but thrive after all kinds of wars and crises. And following from that, I reckon so can we as individual investors. 

So I am following a three-pronged approach to investing now. I am buying good quality stocks, typically FTSE 100 ones, that I believe have dipped below their fair valuation in the current market rout. I am holding on to stocks that have dipped, that I believe can not just recover lost value but far surpass it in the months to come. 

But, I am also ready to sell stocks whose future looks impossibly imperilled, like Russian companies that could be affected for a long time to come by sanctions on the country. Hopefully, though, the situation can still turn around. In other words, I am prepared for the worst, but I am still optimistic about what could happen!

Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

I’m searching for the best penny stocks to buy following recent market volatility. Here are two low-cost shares on my radar roday.

Good as gold

Getting exposure to gold remains a good idea in my opinion as inflation shoots through the roof. The yellow metal rises in value when prices rocket and it increased again following some shocking data today from the US. The Consumer Price Inflation (CPI) rate in the US jumped to 7.9% in February, a fresh 40-year high. It’s likely to keep advancing too as the price of energy grows.

I’d buy shares in Shanta Gold (LSE: SHG) to make money from gold’s move towards new record highs. Investing in producers of the metal instead of the commodity itself — or a financial product that tracks price movements like an ETF — involves a higher degree of risk because it exposes investors to the complicated and often expensive business of mining.

However, purchasing certain gold-producing stocks gives me the chance to receive dividends while piggybacking on the gold price too. The dividend yields over at Shanta Gold are pretty handy, if not exactly spectacular. A predicted reward of 0.2p per share creates a decent yield of 2.1%.

I don’t think Shanta’s current price of 9.4p per share fully reflects the bright outlook for gold prices as tragic events in Ukraine drag on and global inflation soars. This gives me a chance for me to nip in and grab a bargain. Today the Tanzania-focussed miner trades on a forward price-to-earnings ratio of just 7.2 times.

Another penny stock I’d buy today

The soaring cost of raw materials in response to sanctions on Russia poses a significant threat to electric vehicle sales in the near term. Prices of critical commodities like nickel, copper, and zinc have all leapt on concerns of metal shortages and disruptions to supply chains. A sharp slowdown in auto production and a spike in vehicle costs could well be coming down the pipe.

Both of these threats could hit revenues at Trident Royalties (LSE: TRR). The royalties company holds stakes in a variety of base and precious metals assets across the world. And two of its key holdings are the Thacker Pass and Sonora lithium projects, in the US and Mexico, respectively. The former is due to start producing the key battery-making material in the next few months. And first production from the Latin American project is scheduled for 2023.

However, as a long-term investor I still find Trident Royalties highly attractive. Electric vehicle sales might take a whack in the short-to-medium term. But over an extended timeline, sales of these low-carbon vehicles still look set to soar as concerns over the climate worsen. The gradual phasing out of petrol and diesel vehicles over the next decade should certainly supercharge demand for the company’s lithium.

I also like Trident Royalties because it has exposure to various commodities across the globe. This gives it excellent strength through diversification. Like Shanta Gold, this is a penny stock I’d happily invest in right now.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

I consider shares offering passive income, via dividend payments, a core part of my diverse portfolio, providing me with a regular and predictable source of revenue without expending time and effort. This is especially true at the moment as UK inflation runs at rates not seen in three decades.

Right now, medical device manufacturer Smith & Nephew (LSE:SN) looks like a good buy for my portfolio, not only because it has an attractive passive-income offering, but because it has plenty of upside potential.

While the 2.37% dividend yield currently on offer can be beaten by other FTSE 100 companies, Smith & Nephew has a great track record for paying its shareholders.

The London-headquartered firm has also maintained a healthy dividend coverage ratio in recent years. Smith & Nephew’s dividend coverage ratio was 2.16 in 2021, meaning the firm could pay the stated dividend more than two times from its net income.

But what makes Smith & Nephew even more attractive to me is its current share price. As I write, the medical device giant’s share price is lingering around 1,190p, considerably discounted from a year-high of 1,592p in July 2021. Prior to the Covid-19 pandemic, the share price threatened to push above 2,000p for the first time.

There’s no doubt that the last couple of years have been difficult for the device manufacturer, and its current share price reflects that. Peers in the industry, including sector leader Medtronic, have also endured a tough two years.

The pandemic hit the medical device industry hard, with millions of elective procedures cancelled or delayed as healthcare providers and systems such as the NHS reallocated resources towards Covid-19 treatment and vaccine rollout. Supply chain disruption also hammered commercial operations.

Despite the tough operating environment, Smith & Nephew still returned a profit in 2020 and 2021, albeit far below pre-pandemic levels. In 2021, the device manufacturer posted a pre-tax profit of £586m, more than double the previous year despite record Covid-induced hospitalisations in the first quarter of the year and the emergence of the Omicron variant in the fourth quarter.

While there’s ongoing risk that new Covid-19 variants may emerge and dampen growth prospects for the medical equipment sector, I feel confident that 2022 will be considerably more prosperous for Smith & Nephew.

There are now more than six million people in England alone waiting on elective procedures, many of which were delayed because of the pandemic. What’s more, there is considerable political will to reduce the waiting list.

For me, this is why Smith & Nephew looks like a great buy right now. I already have a limited number of shares in my Self-Invested Personal Pension, but the stable dividend yield and upside potential mean I’ll be adding the device manufacturer to my Fund and Share Account in the near future.

James Fox owns shares in Smith & Nephew. The Motley Fool UK has recommended Smith & Nephew. 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.

Key points

• Games Workshop Group has a compound annual EPS growth rate of 31.4%
• Paragon Banking Group’s dividend increased to 26.1p per share for 2021, up from 14.4p the year before
• Both companies exhibited strong revenue growth between 2017 and 2021 

The recent market sell-off has extended to the share prices of most companies. While many investors panicked and immediately sold shares out of fear, I’ve been holding tight and scouring the FTSE 250 index for high-quality growth stocks. I think I’ve found two firms that fit the bill, based on their revenue and earnings per share (EPS) record. Why am I adding them to my portfolio? Let’s take a closer look.

A FTSE 250 games manufacturer

Games Workshop Group (LSE:GAW) is a UK-based manufacturer of miniature figures and games. From my analysis, this is a company that has been growing consistently.

For the years ended June, the business increased revenue from £158m in 2017 to £353m in 2021. Furthermore, its EPS rose over the same period from 95.1p to 372.7p. By my calculation, this results in a compound annual EPS growth rate of 31.4%. As a potential investor, I find this incredibly attractive. That said, past performance is not necessarily a reliable indicator of future performance.

In addition, a trading update for the six months to 28 November 2021 showed that sales improved slightly. On the other hand, pre-tax profits dipped to £86m from £91.6m during the same period in 2020. This can partially be explained, however, by the excessive demand for games during the lockdowns of the Covid-19 pandemic.

A solid banking group

The second company, Paragon Banking Group (LSE:PAG), is a banking firm specialising in mortgages and commercial lending. It has also seen its EPS grow over the 2017 to 2021 calendar years, from 43.3p to 65.2p. This results in a compound annual EPS growth rate of 8.5% While this is not as high as Games Workshop, it still constitutes consistent growth.

In a trading update for the three months to 31 December 2021, however, the business confirmed that 2022 full-year guidance remained unchanged. The company therefore still believes that Covid-19 could pose a risk to its operations, despite positive results.

On the other hand, revenue increased between the 2017 and 2021 calendar years from £252m to £324m. In addition, the annual results for the 2021 calendar year stated that the dividend would increase to 26.1p per share, up from 14.4p in 2020. This is attractive to me as a passive income investor. It also announced a £50m share buyback scheme, another sign the company is in a healthy state.

I like both of these firms because of the fact they exhibit consistent growth over a period of time. Buying shares in each is a good way for me to respond to the current market sell-off, because they could provide long-term growth. I will be purchasing shares in both businesses without delay.

Andrew Woods has no position in any of the shares mentioned. The Motley Fool UK has recommended Games Workshop. 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.