Why UK equities dominate my Stocks and Shares ISA
I’m not necessarily expecting the FTSE 100 to outperform the S&P 500 over the long term. But I’ve built a portfolio in my Stocks and Shares ISA that’s heavily tilted towards UK equities.
That’s not something I set out to do, but it’s the way things have gone. In terms of individual stocks, the most attractive opportunities I’ve seen have been on this side of the Atlantic.
Discount valuations
Investing well comes down to buying shares in businesses at prices that are low relative to their long-term prospects. And I think the UK has the most obvious chances to do this.
Rentokil Initial (LSE:RTO) is a good example of this. The FTSE 100 company is the largest pest control firm in the world, with sales around 75% higher than Rollins – its nearest competitor.
Both firms operate in the same market (which I think is set to grow) and both are looking to expand. Despite this, the UK stock trades at a much lower price-to-eranings (P/E) multiple.
The comparison isn’t perfect – Rentokil has a lot more debt after a big acquisition. But even accounting for this, there’s still a big difference in terms of valuation.
Pest control is the subject of various complex regulations. So even if I’m right about demand growing in the future, it’s possible the businesses might do less well than I’m expecting, which is a risk.
With my Stocks and Shares ISA, further buys are going to have to wait until I get some dividends later this month. But Rentokil is on the list of stocks I’m looking to buy when that happens.
Under-the-radar opportunities
Several UK companies have recently been looking to list in the US to attract the attention of well-capitalised investors. But that can leave behind under-the-radar opportunities.
One example is JD Wetherspoon (LSE:JDW). The pub chain doesn’t attract anything like the kind of attention from Wall Street that S&P 500 firms do, but I think this is a good thing.
The business has a strong competitive position. It uses its scale to charge its customers lower prices than its rivals and this is something that I think is going to be a durable advantage.
Rising costs in the industry have been (and remain) a risk. And this is especially true for firms that operate with relatively narrow margins – as JD Wetherspoon does.
The company, however, has been working hard to bring down its own internal costs. This has involved buying freeholds to bring down lease payments and closing its less profitable venues.
On top of this, like-for-like sales have been consistently growing at a faster rate than the wider industry. At a P/E ratio of 15, it’s another stock I’m looking to buy when I have cash available.
Buying British
I’m not entirely out of US stocks and I want to maintain a diversified portfolio. But UK shares have been gradually coming to take up the majority of my ISA.
Whether the valuation gap between the UK and the US closes remains to be seen. But if it doesn’t, I’ll look for a return on my investments in the form if dividends and share buybacks.
The post Why UK equities dominate my Stocks and Shares ISA appeared first on The Motley Fool UK.
Pound coins for sale — 31 pence?
This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
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Stephen Wright has positions in J D Wetherspoon Plc and Rentokil Initial Plc. The Motley Fool UK has recommended Rollins. 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.
