Boohoo (LSE:BOO) is recognised as one of the pioneers of fast fashion. The boohoo share price has been on a downward trajectory for a while, however. Could the shares rebound and is this an opportunity to buy cheap shares for my holdings? 

Boohoo share price implodes

Boohoo has seen its success derive from marrying two things together. These are the rise of online shopping and fast fashion. More and more consumers shop online for essential goods, including clothing and footwear. Boohoo has boosted the fast fashion market by replicating high end fashion trends by mass producing them at a low cost and selling them at a low price point.

Boohoo shares benefited after Covid-19 restrictions meant many of us were unable to go out to our favourite shops. This forced many more consumers to turn to online shops. The shares reached 400p in June 2020. As I write, the boohoo share price is almost a penny stock, trading for 102p. At this time last year, the shares were trading for 342p, which is a 70% drop over a 12-month period. 

So what happened to boohoo shares? Well, a mixture of macroeconomic issues, scandals, and dwindling profit margins are to blame, in my opinion. From a macroeconomic perspective, rising interest rates and cost of materials have hampered margins and performance. In addition to this, the supply chain crisis won’t have helped. A scandal around dubious supplier practises and labour abuse definitely spooked investors last year. Finally, a lawsuit in the US accusing the firm of sham discounts has further deepened boohoo’s woes.

Rebound potential or one to avoid?

The boohoo share price reached its highs due to its quite remarkable journey to date. It started as a market stall in the North West, to a multi-million pound fashion business with partnerships with some of the biggest pop culture names on the planet. I understand that past performance is not a guarantee of the future, but it must not be ignored. In the last five years, boohoo’s revenue has increased sixfold! In addition to this, profits have grown by close to 400% in this same period. A recent update in December mentioned a profit warning but sales were still strong and up, compared to the same period last year. 

My focus is on whether or not boohoo is attempting to address the issues that have led to the share price crashing so badly. The labour abuse issue at one of its suppliers was particularly damning. Well, boohoo is currently building its first ever production facility. In addition to this, it will be used as a supplier training centre too. So it looks to me like it is taking the necessary steps to rectify this major wrong.

Boohoo can’t control macroeconomic issues. I can’t help but think as the pandemic eases, the supply chain issues could be less of an issue and this could boost boohoo shares. However, rising costs could hamper the boohoo share price due to profits being squeezed.

Overall, I believe the boohoo share price could head upwards once more but I don’t think it will experience the highs of 2020 for some time. Personally, I wouldn’t add the shares to my holdings. There is still some work to go to restore investor confidence, and macroeconomic issues it cannot control put me off. I will keep an eye on developments, however.

Jabran Khan has no position in any shares mentioned. The Motley Fool UK has recommended boohoo group. 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.

Concerns about inflation are on the rise. And it seems increasingly difficult to find FTSE 100 stocks that will not be impacted poorly by it. There is little doubt that many companies will see a rise in their costs — indeed they already are. But there are others that might be impacted only minimally. Here are three such that I like. 

BP could rise higher

The first most obvious guess is oil stocks. They have made big gains as oil prices rise. BP and Royal Dutch Shell are the two big oil FTSE 100 stocks, and I like and own both of them. But if I had to pick one between the two, my choice would be BP. While both of them are still trading below their pre-pandemic share prices, in terms of market valuations, BP is significantly more attractive. 

With a price-to-earnings (P/E) ratio of 16 times, it trades a little below the FTSE 100 P/E and is way lower than the 44 times for Shell. Moreover, right now its dividend yield at 4.1%, which is slightly higher than Shell’s at 3.9%. Of course, it’s possible that over the course of the year BP’s valuation could catch up to Shell’s and the latter’s dividend yields could rise much higher than BP’s. It is also possible that their current comparative advantage will be lost if growth slows down, and the oil price increases. But for now, BP looks good to me. 

SSE is my FTSE 100 utility pick

I also like utilities, purely because of the nature of their business. There is no denying that inflation would impact them too, especially if economic growth weakens, but there is only so much that utility demand can decline. And FTSE 100 utilities also have higher than average dividend yields. Among these, I have bought the electricity stock SSE, keeping the long-term future in mind. It is a big green energy producer that has top credentials in a world where tackling climate change is becoming increasingly important. It also has a really low P/E of 6.3 times, which makes it far more attractive than many other FTSE 100 stocks. 

Imperial Brands is a resilient stock

Finally, I know this is controversial, but I like the Imperial Brands stock. It is an old economy, tobacco stock, but hear me out. First things first, it is making efforts to transition to tobacco alternatives. So, who knows, it could still have a bright future and not one that impacts health adversely. Also, it has a big dividend yield of around 8%, which could be sustained going by its solid earnings. And finally, its share price has been rising over time, and could continue to do so in the foreseeable as well, going by the available forecasts. I own the stock, and even for its flaws, I still think it is a particularly good buy right now because it is a consumer defensive whose demand does not vary much with inflation.

Manika Premsingh owns BP, Imperial Brands, Royal Dutch Shell B, and SSE. The Motley Fool UK has recommended Imperial Brands. 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.

Since the arrival of the pandemic in early 2020, the eazyJet (LSE: EZJ) share price has been pummelled by the market. And that’s not surprising given the collapse of demand in the travel industry and the associated grounding of many of the airline’s planes for months on end.

At 609p, the stock is down by just over 50% since February 2020. And over the past year it has fallen by almost 4%. So the big questions for me are, does the business and stock still have the potential to recover to previous highs? And if so, should I buy it now?

Recent positive news

The most recent news from the company came last week with the first-quarter trading statement to 31 December 2021. The directors said the loss in the first quarter almost halved compared to the figure a year ago. And operating cash burn reduced “significantly”. However, the rise of the Omicron variant of the coronavirus affected short-term bookings. But bookings increased when the UK government decided to remove all travel testing requirements.

Overall, the first quarter financial performance was in line with the directors’ expectations. And in October and November, load factors improved with both months coming in above 80%. But the progress stalled in December when Omicron arrived. And the directors expect the variant to continue to affect sales during the second quarter.

But restriction-free travel in the UK from 11 February is a major positive. And easyJet expects the move to continue boosting sales in the months ahead. Meanwhile, other countries including France are also relaxing restrictions. And the directors say such moves are “a welcome step closer towards restriction-free travel across the whole of Europe”.

And the evolving situation suggests to me the potential for easyJet’s airline business to trade its way back to full capacity in the coming months. Meanwhile, the directors reckon the holiday division is strengthening its place as a “significant player” in the holidays market. And over 50% of the programme is sold with stronger margins achieved than those realised in 2019.

Transformation and a positive outlook

Chief executive Johan Lundgren said the company “transformed” many areas of the business during the pandemic. These measures include optimising its network and flexibility, and finding sustainable cost savings. He reckons such improvements are helping to “partially offset” inflationary pressure. And they are “step-changing” ancillary revenue coming into the firm now. Looking ahead, Lundgren expects a “strong summer”. And that will likely be driven by pent-up demand returning near to 2019 levels.

City analysts have pencilled in a bounce-back in earnings of around 2,000% for the trading year to September 2023. However, even if that’s achieved, earnings will still fall short of those in 2019 by about 35%. And that suggests the recovery story at easyJet could still have many months and years to run.

Meanwhile, the earnings multiple when set against those analysts’ expectations is around 13. That’s not an outrageous valuation, but it could prove to be expensive if the business misses its forecasts. And there’s always a risk of that happening with a company like easyJet because the business is notoriously cyclical and any number of operational challenges could arise to derail profits.

I think easyJet shares look set to recover further over time, however I’m not keen enough to add the stock to my portfolio because of the ongoing cyclical risks.

Kevin Godbold 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 always find best value in stocks that are underpriced for their potential. But in today’s stock markets these are getting harder to find. Markets have been rising over the past year, and many recovery stocks have run up a fair bit. So it is an especially rewarding moment when I do find one that I like and it is priced low too. The stock I have in mind is the AIM-listed penny stock Staffline (LSE: STAF).

What’s up with the Staffline share price?

Staffline is trading at 55p right now, having seen a spectacular fall since September last year following its half-year results. The company did report a loss at the time, but it was minuscule compared to the loss it had seen in the year before. In other words, it looked like it could turn around. In an article I wrote on the company after the results were released, I was keen to buy it. My understanding was that its share price could rise further, though perhaps not at the same pace as before. But in the ensuing months, its share price actually fell.

Strong trading update 

Since I have not bought the stock yet, I actually think it is a good opportunity to buy it now. The first big reason is that its latest trading update is encouraging. Its revenue has increased only by a small 1.6% for the year ending 31 December 2021, but its underlying operating profit is up by a huge 108% compared to the year before. Staffline also has a sunny outlook. It says it has exceeded expectations of both profitability and cash flow during the year. And it expects the momentum to continue into the next year as well. It is also confident of its prospects in the medium and long term. 

Dwindling risks

Next, the company’s earlier concerns about macroeconomic uncertainties seems to have disappeared. And I can see why. The UK economy has returned to pre-pandemic levels recently and its prospects look good too. The Brexit-related limbo that lingered for years is a thing of the past as is the worst of the pandemic, at least that is how it appears. The company also point to a pick up in the travel sector, which is one of its historically strong areas. 

Competitively priced penny stock

Also, after its share price fall, the company’s market valuation looks particularly good. It is not a profit-making company, so we cannot consider price-to-earnings (P/E) here, but the price-to-sales (P/S) ratio is 0.1 times. Not only is this almost nothing, it is way smaller than that of its peers too. I think this in itself makes a case for me to buy the stock. The fact that its share price is quite low in absolute terms as well, considering that it is a penny stock, is another reason to like it. I will buy it soon. 

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.

A lot of shares have had a rocky start to 2022. That includes data centre owner and crypto miner Argo Blockchain (LSE: ARB). After falling this month, the Argo Blockchain share price now sits 14% lower than it did a year ago.

Is a recovery in sight? Or could the risk of further falls mean I should consider selling my Argo shares?

Mounting pressures

I think the price fall reflects Argo’s role as a crypto miner. Investors worry that mounting regulatory pressures could see further falls in the price of cryptocurrencies like Bitcoin.

I see that as a definite risk. Some countries have banned crypto mining. I expect further restriction on trading too. Even in nations where crypto mining and trading continue, there are mounting calls for them to be more heavily regulated. That could hurt crypto prices — and the Argo Blockchain share price.

Bull case

But things will not necessarily pan out that way. At the moment, the crypto landscape is still a bit like the Wild West. Bringing in new rules and sheriffs could scare people off, leading to prices collapsing. From a different perspective, it might simply be a step towards integrating crypto more closely within the global financial system. If regulation offers stability and consistency, it could actually end up being good for crypto price stability, by improving market transparency.

On top of that, Argo is investing heavily in its big new mining facility. I see it as no accident that the complex is located in the American state of Texas, long associated with a strong ethos of freedom. While other countries and states clamp down on crypto mining, I do not think Texas will be keen to do that. So a broad clampdown worldwide could actually help Argo by giving it a competitive advantage thanks to its large plans for the Texas operation.

Where next for the Argo Blockchain share price?

Argo’s share price is clearly influenced by broad factors beyond its control, especially the price of Bitcoin and other cryptocurrencies. So if Bitcoin falls, I definitely think Argo shares could keep following it down. On top of that, investor concerns about the potential cost of kitting out the Texas facility could exert more downward pressure on the shares.

In the longer term, however, I think markets may value Argo with more regard to its specific business not just the pricing of crypto in general. I think the Texan data centre could turn out to be a source of competitive advantage. I also think the company’s data centres – which have uses beyond crypto mining – are a potentially lucrative source of income. Many companies continue to increase their needs for data storage, which could help support industry profitability.

My next move

I expect the Argo Blockchain share price to continue to be volatile, especially if crypto pricing moves around dramatically. The shares could keep falling. But I am buckled in for the ride and continue to see long-term reasons for optimism when it comes to Argo. I will not be adding to my position, but nor do I plan to sell at the moment. For now, I am waiting to see how progress at the Texan facility impacts the share price in coming months.

Christopher Ruane owns shares in Argo Blockchain. 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.

These FTSE 100 stocks seem to offer top value at current prices. Are they too cheap for me to miss today? Or should I avoid them like the plague?

Riding the rising oil price

It seems to be all systems go for the oil price. Late last week the Brent crude benchmark oil price struck seven-year peaks above $90 per barrel. The fall of this key technical level could lead to more heady share price gains for fossil fuel producers like Shell (LSE: RDSB). Speculation is growing that the black liquid will barge through $100 sooner rather than later as supply issues grow.

Shell’s share price has just leapt to its highest for two years as a result. But it still looks pretty cheap on paper, leaving plenty of scope for more gains. Today the oil major changes hands on a price-to-earnings growth (PEG) ratio of 0.2. This is well inside the bargain watermark of 1 and below.

As a long-term investor, though, I worry about what fate awaits Shell’s share price in the years ahead. Crude demand is in danger of sinking much more sharply than some anticipate as investment in renewable energy takes off. There’s also the risk that institutional investors will turn their backs on the world’s worst-polluting companies as fears over the climate crisis grow.

Britain’s biggest private pension fund, the Universities Superannuation Scheme, is the latest market mover to dedicate billions of pounds to more environmentally-friendly investments. Shell is spending fortunes to build its exposure to greener energy forms, but I fear this could be too little too late. Its main business is oil and it stands to lose out as the responsible investing phenomenon gathers pace.

A better FTSE 100 share to buy?

Tesco (LSE: TSCO) remains a highly-popular FTSE 100 stock and it’s not hard to see why. It’s a giant in the ultra-defensive food retail industry and boasts a loyal customer base that dwarves its rivals. It also offers the biggest online delivery service in the business and is planning to expand its service in this fast-growing sub-segment, too.

I’m afraid Tesco is another share I’m not prepared to take a risk with, though. It’s not just the expansion of discounters Aldi and Lidl and US online goliath Amazon that pose significant long-term risks to profit margins. A slew of post-Brexit regulatory changes that could impact stock availability, cause labour shortages, and prompt higher import expenses threaten to hit profits hard as well.

The danger of prolonged carbon dioxide shortages is another major risk for Tesco. A government supply accord is about to run out that could hit fizzy drink production and cause massive meat shortages.

Tesco’s share price looks pretty cheap today. The supermarket also trades on a PEG ratio of 0.2. However, the colossal dangers facing the business once the current financial year ends next month means I won’t be bargain shopping here. There are plenty of other US and UK shares I’d rather buy than Shell or Tesco today.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Amazon and Tesco. 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

• Cyber defence stock Darktrace has a growing customer base
• Ferrexpo presents a solid earnings record
• Buying both companies could add diversity to my portfolio

The FTSE 250 is packed full of exciting stocks representing all manner of industries. Looking for companies in this index can bring me significant growth potential and diversity. I’ve found two very different stocks to buy for both these reasons. Darktrace (LSE: DARK), an artificial intelligence (AI) cyber defence company, and Ferrexpo (LSE: FXPO), a metals stock, both intrigue me. Why should either have a place in my portfolio? Let’s take a closer look.

A speculative buy in AI

Darktrace became a public company in April 2020. For the past six months, however, the FTSE 250 stock is down about 48%. This price action has occurred for a number of reasons, including widening losses and a short-selling attack.

This attack was conducted by a fund named ShadowFall in January 2022. The fund stated that it took action because Darktrace’s “business is watery-thin, driven by aggressive, promotional, sales focus”.  

For the year ended 30 June 2021, Darktrace recorded losses before tax of $147.62m. This compared to the previous year of $26.93m. While these losses do not appear to be on a positive trajectory, revenue for the same period in 2021 was up 41% on the previous year.

Also, a recent trading update for the six months to 31 December 2021 was positive. The customer base had increased 39.6% year-on-year and customer acquisition expectations for the 2022 fiscal year were raised.

A FTSE 250 metal stock

Ferrexpo produces iron ore pellets from mining operations in Ukraine. The company supplies iron to steel mills throughout Europe and Asia.

The recent reports of increased hostilities in Ukraine, between Russia and Western countries, are a small cause for concern. While I still think full-blown war in Ukraine is unlikely, Ferrexpo’s production may grind to a halt in the event it does happen. Although I will be watching this situation closely, I think diplomacy will ultimately decide the matter instead of war.

Fundamentally, for the year ending 31 December 2020, Ferrexpo reported earnings per share (EPS) of 108.1. Compared with the same period in 2016, the company has an impressive EPS compounding annual growth rate of 26.3%. As a potential investor, solid track records in earnings are integral to my decision-making.

In November 2021, Liberium expressed positive sentiment about the FTSE 250 stock. It emphasised the company’s decision to expand into copper production. This move, according to Liberium, is forward-looking because copper is widely used in the electric vehicle industry. In the same report, however, the production of iron ore pellets for the 2021 calendar year was broadly the same as 2020.

I like both of these stocks and buying them would give me exposure to the technology and metals sectors. While Darktrace is more of a speculative purchase, Ferrexpo has a strong track record. I will be buying up these stocks now and capitalising on the diversification they provide.

Andrew Woods 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.

The FTSE 100 index has shown pretty mild trends so far today. As I write, the index is at 7,473, which is just around 0.1% up from the last close. There is really nothing dramatic going on in the prices of index components today either. However, I could not help observing a trend among the biggest losers. 

FTSE 100 miners are big losers today

Three of the 10 biggest losers are industrial metal miners. Since they are also among the biggest dividend yield stocks, they attracted my attention in particular. Rio Tinto has seen the biggest decline of 2.8%, followed by Anglo American, which is down by 1.6%, and Glencore, which has fallen by 1.3%. The big miner not on this list, and in fact the biggest FTSE 100 dividend yield stock, is Evraz. I think there is very good reason for that. But I will come to it later. Also note that BHP has stopped trading on the London Stock Exchange from today onwards, so it is no longer in consideration when talking about industrial metal and commodity miners. 

Why are they down?

So why are they down? For lack of any immediate triggers that I can find, I would think this is sentiment-driven. There are risks to economic growth, and as cyclical stocks, miners are bound to be impacted in a slow down. There are two developments to consider here. The first, of course, is inflation, which has been looming large as a risk for a few months now. 

In fact, if it were not for the fear of rising inflation, it is quite likely that the miners would still be in a boom. They did very well recently as demand for metals was pushed up by Chinese public spending. But when fears of a broad-based price rise started doing the rounds, the government pulled back. Despite the subsequent decline in metal prices however, inflation continues to rise.

High inflation in turn is sparking higher interest rates. Forecasters now expect the Bank of England to continuously increase interest rates in its monetary policy meetings. This could further slow down the economy. And mining stocks are nothing if not cyclical. So it follows that risks to the economy could result in some sentiment-driven damage to the stock prices. 

What happens next?

That said, it is entirely possible that before the end of the day, the miners could have completely flipped the script and ended up with gains. Evraz, for instance, is up close to 1% so far today after it released its production report. The report itself is mixed, but it does show an increase in sales in the final quarter of 2021 compared to the quarter before. Also, production of coking coal and iron ore is up, even though that for steel products is slightly down. 

What it means for my investments

But since all the others are down so far, I would look out for more such movements in their prices. That could offer me a clue on investor outlook on the mining sector. I am invested in both Anglo American and Rio Tinto, and the key to how much longer I should stay invested might just be in these easy-to-miss market movements. 

Manika Premsingh owns Anglo American and Rio Tinto. 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.

The Lloyds (LSE: LLOY) share price has left a lot to be desired in my eyes. It seems to perpetually stick between 40p and 80p with no end in sight and has been slow to recover from the Covid crash. But the share price has shot up 10% in just the last month. With talk of interest rate rises and the economy in recovery, I’ve started wonder if I should reconsider my views on the UK’s largest mortgage lender.

Share price and fundamentals

Lloyds’ share price has been on a steady uptrend over the past year. It started last January at around 33p and has increased 59% to 53p at time of writing. Growth of 45% in a year is nothing short of fantastic and represents some great strides made by the bank in that time. This still sits at 10% below the pre-pandemic price, and now looks like a tempting buying opportunity to me. The pandemic seems very close to being in the rear-view mirror and a return to normality could be just what the shares need to bump them back up. But there’s no ignoring the nearly 10 years of stagnation that came before.

The 2008-09 financial crash obliterated the share value of banks around the world. Lloyds’ shares fell by almost 90%, going from 300p all the way down to 50p between 2007 and 2009. Since then, the shares have been languishing beneath the £1 mark. I think that tighter regulations on the financial sector are to blame for this so, unless the UK wants to de-regulate, I don’t see the share price reaching those heights again.

There are, however, other reasons to consider adding Lloyds to my portfolio. It has an A- on the CDP score. The share’s price-to-earnings ratio (P/E) is a very reasonable 7.96 and Lloyds issues a small dividend. Right now, the dividend yield sits at 2.37%, and although Lloyds decided to forego one last year, it is still worth considering.

Lloyds’ 2022 plans and beyond

Lloyds has notably been taking steps to increase profitability and expand its revenue streams. The bank made headlines as it announced plans to invest in the development of new rental properties around the country. The housing market is very competitive at the moment and renting homes could well pay off in the long run. But it remains to be seen if it will be as profitable as simply lending mortgages.

Lloyds has also been shutting branches across the country. Many other banks have been doing the same as more and more people prefer to do their banking online. The saving incurred from not having to hire staff or rent spaces could add up to tens of millions over the long term, but I’m concerned that a reduced high street presence could ultimately hurt Lloyd’s brand. I’ve wondered if Lloyds is the largest mortgage lender in the country because of its sheer ubiquity and I worry branch closures could affect its market share.

Have I changed my mind?

On top of all the listed cost cutting measures, the Bank of England is expected to raise interest rates, which will in turn allow Lloyds to earn more from its borrowers. I still don’t think the share price will reach the heights it once did. But Lloyds seems like a good bet against inflation, and I will be adding it to my portfolio.

James Reynolds has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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.

If I wanted to start investing in shares, one question I would have is where to begin. Should I buy US or UK shares? What about growth or income? Should I focus on FTSE 100 names or smaller FTSE 350 companies?

The answers would depend on my own personal investment objectives. Personally, I would start hunting for cheap UK shares to build my portfolio. Here is why.

I would start investing by hunting for long-term value

Cheapness is not just about price. Rather, it is a combination of price and long-term value. I would want to consider whether what I pay for a share today is a bargain relative to how much it will be worth in years to come.

But nobody knows what a given share will be worth tomorrow, let alone a decade from now. That is why when I look for value, I try to build a margin for error into my calculation. If I think today’s share price is only fractionally below the value it will generate over the long term, I would not feel it is worthwhile for me to buy it. After all, results can disappoint and changing industry conditions can hurt a company’s profit. So I look for situations in which I think the current price substantially undervalues a share relative to its potential future value.

What makes a share valuable?

But how can one judge what the potential future value of a share might be?

It is definitely an art, not a science. I think it can be helpful to remember that just as its name suggests, a share basically represents a fraction of the excess cash a company may generate in future. So I look for companies that I think will have the means to generate large amounts of excess cash.

To do that, I consider what assets a company may have that will enable it to do that. Those could be things like proprietary technology, strong brands with loyal customers, reserves of natural resources, or a monopoly in a certain area.

Cheap UK shares

Right now, UK stock markets trade on lower multiples than in some other countries. So quite a few UK shares seem cheap to me.

If I was to start investing for the first time, I also think UK shares would be an easier place for me to begin simply in terms of market understanding. From Greggs to Next and Stagecoach to Smith & Nephew, I am already familiar with many businesses as a customer. If I started looking for shares in, say, Canada or Spain, that would likely not be the case.

But my personal experience would only be one part of my assessment approach to finding cheap UK shares I could add to my portfolio. After all, a good business does not necessarily make for a rewarding investment. My investment returns will depend on the price at which I buy a share. To assess that, I need to have some sort of framework to judge whether a share is trading cheaply relative to its long-term potential value. That is why I look for shares based on understanding their source of competitive advantage and profitability, not just their current share price.

Christopher Ruane owns shares in Stagecoach. 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.