Investing in top-notch UK shares at a discount is a proven recipe for building wealth. And even with the stock market enjoying a rally so far this year, there are still plenty of undervalued opportunities to capitalise on.
Needless to say, that creates an interesting opportunity for building wealth, even when starting from scratch later in life.
Snapping up bargains opens the door to market-beating returns. And even a few extra percentage points can amount to a significantly larger portfolio when left to compound in the long run.
In fact, by making the right moves today, an earlier retirement could be unlocked.
Investing in the best UK shares
In the short term, the stock market can be exceptionally fickle. With mood and momentum dominating stock prices on a daily, weekly, or even monthly basis, volatility is created, making the stock market appear like a casino.
However, when zooming out across years, the quality and success of the underlying businesses ultimately determine the performance of a stock.
That makes investor’s lives far easier but we now know what to look for – high-quality businesses with the capacity for sustainable long-term expansion. And while the short-term volatility can be unpleasant, it also creates awesome buying opportunities for prudent investors.
So what should investors be looking for? Identifying the best businesses of the future isn’t an easy task. After all, the constituents of the FTSE 100 today are very different compared to 50 years ago. But the list of potential candidates can be narrowed significantly with a few basic filters.
By focusing exclusively on firms with robust balance sheets, highly cash-generative operations, and notable competitive advantages, the majority of subpar UK shares can be eliminated from consideration. At this point, investors can start digging deeper and zooming in on valuations.
Looking at an example
AstraZeneca‘s (LSE:AZN) currently the largest company on the London Stock Exchange by market-cap. The pharmaceutical giant’s behind a vast array of life-saving drugs with a diverse pipeline of upcoming products.
With demand for healthcare not disappearing anytime soon and new products on the way, I think it’s fair to say the firm has some fairly sustainable cash flows. And its patent portfolio creates a wide moat against its competitors.
What about the balance sheet? As of March this year, the group has just over $34.5bn in total debts & equivalents. That’s obviously quite a chunky amount. And it goes to show the highly capital-intensive nature of drug development.
But despite appearances, the balance sheet isn’t overleveraged. There’s $8bn of cash & equivalents providing short-term flexibility. But more importantly, the group’s operating profits are able to cover its interest expenses more than seven times over.
Risk and reward
There are obviously other factors to take into consideration when evaluating quality. But this brief analysis certainly indicates the company is in a strong position. That’s arguably why shares are trading at a price-to-earnings multiple of 38. For reference, the market average is typically around 12 to 15.
What does this mean? In short, while AstraZeneca might be a top-notch company, the shares aren’t cheap. And therefore, it may be wiser to look at other potential long-term opportunities.
This post was originally published on Motley Fool
