As a stocks and shares investor, I’m always on the lookout for cheap UK shares to buy. There are several criteria that I filter for to come up with a shortlist.
I look for quality shares with growing earnings and steady profitability. In addition, I like to see strong balance sheets with plenty of cash and low or no debt. I also look at valuation to ensure I’m not overpaying.
Lastly, I like to see rising share price momentum over several months, but prefer to buy when share prices have drifted lower in recent days or weeks.
Top cheap UK shares
Currently, I can see several cheap UK shares that match my criteria. One of these is Luceco (LSE:LUCE). I last highlighted this LED lighting manufacturer in November. Since then, its share price has risen by over 30%. Should I sell, hold, or buy some more? Given its recent trading update, I’m tempted to buy some more shares.
Strong trading momentum continued in 2021. Residential demand continues to be strong, boosted by heightened home improvement activity. Given the UK housing market is currently particularly buoyant, I would expect robust demand for LED lighting.
Luceco offers high returns, double-digit margins, earnings growth, and dividend income. I reckon that any weakness in its share price would be a good opportunity for me to add to my holding.
Rising raw material and freight costs are potential risks that could affect its profit margin. That said, it has taken action to mitigate these risks. The company also has concentrated exposure to the UK market, so any overall economic downturn in the UK could affect its prospects.
Overall, I think the positives outweigh the risks. Luceco continues to innovate and release new products in high-growth areas such as electric vehicle chargers. This should bode well for future growth.
Another high-growth trend is e-commerce and the related demand for new warehousing. One of the best cheap UK shares I’d consider in this space is Somero Enterprises (LSE:SOM). It manufactures laser-guided equipment used to level large quantities of concrete, such as in flooring for large warehouses.
Its share price has almost doubled since I wrote about it in October, but similar to Luceco, I would still consider buying the shares today. Somero offers double-digit return on capital and profit margins. Revenues and profits are steadily growing and valuation is undemanding. It also offers a dividend yield of 4.5%, which I view as as very reasonable in the current climate.
It recently reported strong trading momentum in the US, driven by demand for new warehousing. Similar to Luceco, it’s nice to see another company that continues to innovate new products. Somero recently introduced a new plywood sheet stripping machine to its range of products. And further new products are expected before the end of the year.
One thing to bear in mind is that Somero is in a cyclical industry and its earnings could suffer in the event of an economic downturn. North America, Europe, and China are its largest markets. But it also has a meaningful presence in several other parts of the world where demand continues to fluctuate.
That said, I think its largest markets could see continued growth. Overall, I’d consider adding these cheap UK shares to my Stocks and Shares ISA.
Harshil Patel owns shares in Luceco. The Motley Fool UK has recommended Somero Enterprises, Inc. 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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