Best UK Stocks to Buy Right Now (September 2022 Update)

Many investors want to know the best stocks to buy right now in the UK. However, many lose money because they don’t know what to look for when investing on the London Stock Exchange. This is made worse because people follow the wrong advice and end up compounding mistakes.

In this article, you’ll learn what you need to know to identify and buy the best UK stocks for profitable investing. But first, let’s dive into UK stocks I’ve been been watching recently.

Best UK stocks I’m watching right now

The stock ideas below are from my newsletter, Buy the Breakout. You can subscribe below and join 10,000+ traders and investors to get the next edition in real-time, for free.

  1. Arrow Exploration (AXL)
  2. Watches of Switzerland (WOSG)
  3. Cake Box (CBOX)

Arrow Exploration (AXL)

Arrow Exploration is a clear stage 2 stock.

It’s uptrending.

Here’s the chart:

We can see the ideal entry was the breakout of 9p.

However, we’re now seeing a base in play since the stock topped out in June.

Notice how the stock has put in higher lows and has now reclaimed a space above the 50 EMA.

But it’s clear that the 20p mark is proving resistance.

Arrow is actually producing, and has a five well program in Q4 of this year.

I have no idea on the fundamentals of this company but this is a chart I can get behind if it breaks out.

Notice how those wicks extend above 20p showing that the stock rallied and got sold into.

That means sellers are keen to close positions above 20p.

But all sellers come to an end – so I think it’s worth watching this batle between the bulls and the bears play out.

Positives:

  • Stock uptrending with a nice chart
  • Oil & gas sector sector

Negatives:

  • SETSqx so can be illiquid
  • Drill risk in Q4

Watches of Switzerland (WOSG)

Watches of Switzerland has been a great stage 2 stock in the past.

However, the trend has now reversed and the stock is now clearly in a downtrend.

The recent results show the company is still growing revenue with constant currency at +25%.

However, one thing caught my eye in the results.

Of course registration of interest lists continue to extend. It’s free to register.

What that means is that people can register with no obligation to take up their statement to buy.

It’s a great trade.

If you don’t sign up, you can’t buy.

If you sign up, you can buy but you don’t have to.

Watch prices (especially Rolexes) have been going crazy over 2021 but that’s not so much the case now, with prices well off their peak.

What’s more important though is the chart:

That 750p level is getting sorely tested.

It’s been hit repeatedly and bounced back – so far.

The price is not exorbitantly expensive here with forecast EPS of 53.5p against a share price of 771p.

That gives a PE of 14.4.

But any hint of a slowdown in growth or even a warning suddenly makes the stock a lot more expensive.

There are two types of people who buy watches:

Those that can afford them, and those that can’t.

Those that can afford them will likely not skip a beat when thinking of their next watch.

But those who can’t will certainly be thinking twice. And maybe not taking up their option to buy.

I tested a short last week and closed this quickly.

But a breakdown of 750p and I want to be selling.

Positives:

  • Not expensive (but also not cheap)
  • Company growing (especially in the US)
  • SETS so more liquidity available

Negatives:

  • Sector demand likely to diminish?

Cake Box (CBOX)

Cake Box is a capital light business model that is scalable.

The issue is though Cake Box succeeds when its franchisees succeed.

And recently, they’ve been struggling.

Remember when I said macro themes take time to play out?

Well, Cake Box issued a profit warning last week which saw the stock fall nearly -40%.

Franchisees have seen LFL sales decline 2.8% in the first half to date. That means growth is now reversing.

The company boasts about a strong pipeline of potential new franchisees but everyday it seems we see another pub or café has gone bust because their energy price has multiplied several times.

My belief is that it would be a big gamble to open up a unit until there is certainty on the situation.

Shore Capital has updated forecast EPS for 10.9p.

A PE of 13.8 seems expensive for a stock that is now in reverse growth and facing significant headwinds.

And that’s assuming it doesn’t warn again.

Here’s the chart:

The gap from the profit warning has now closed, and 150p is a big round number.

I want to add the second lot to my position at 155p.

I’ll close the trade if I’m wrong around 165p.

There was a big director buy on the day of the warning which has fluffed the price up given the size.

And in fairness, it’s relatively meaningful (though he did sell a chunk a lot higher).

Let’s see what happens.

I can’t imagine people are going to be rushing for personalised cakes during the COLC but I could be wrong.

I do notice though that 39% of all reviews on TrustPilot are 1-star reviews.

Quality and taste are regular mentions.

These are both subjective, and people only ever write reviews after a bad experience, but I’ve flagged this before because it’s unusual to have so many disgruntled reviews.

Positives:

  • Big CEO buy
  • Strong balance sheet (for now)

Negatives:

  • SETSqx so illiquid
  • Could take time to play out
  1. IG Design (IGR)
  2. Jadestone Energy (JSE)
  3. Dr. Martens (DOCS)

IG Design (IGR)

IG Design is the old International Greetings. Stock market darling turned stock market pariah.

It started with the Value Creation Incentive Scheme.

Which was basically the directors dumping their stock then reloading by giving themselves nil-cost options.

Nil-cost options are just the transfer of money from your pocket as a shareholder to their pocket as a director.

This was almost the top. Then in October the stock announced a profit warning.

I managed to get some borrow here and repeated the trade earlier this year (profit warnings rarely come in ones) however I’m now looking at the stock as a potential long.

Here’s the chart:

It’s too early to say if this is a stage 2 stock.

But it has the hallmarkets of a stage 1 – even if it’s brief.

By zooming out a little we can see the stock appears to have bottomed, for now, at least.

The lowest price it printed was around 45p so the stock is over 100% up from the lows.

Now, that doesn’t mean it can’t go back there. But if the selling pressure at 45p was that intense it would’ve held the stock down.

Clearly, there are more buyers below this level than above as otherwise the stock wouldn’t have been able to rally.

I don’t know much about this company but it operates in an industry that I wouldn’t expect to be terribly high margin.

And there has been some director buying, but nothing that strikes me as conviction buying straight away.

But if there is one thing I’ve learned in seven years of doing this for a living, it’s that the chart doesn’t lie.

It’s the money-weighted sum of market opinion and sentiment.

This is what I’m seeing.

The stock has rallied and is now building a small base below 100p.

I’d be interested in trading this if the stock broke out of this range and I’d keep my stop nice and tight below the base and out of the stop loss liquidity.

The recent low was 89p, so 85-86p is likely where I’d be wanting to cut the trade.

There’s some potential resistance at 113p but after that the next logical resistance point would be at 180p where the stock opened after its last profit warning.

I’d be wary of holding this trade into earnings, but as it reported on 28 June there should be some time away yet (unless trading has significantly deteriorated ).

It’s worth having a read of the outlook in the results but for me this would be a technical trade only.

Positives:

  • Stock appears to have found a bottom
  • Building a shallow base

Negatives:

  • SETSqx so can be illiquid
  • Recent warner

Jadestone Energy (JSE)

Jadestone Energy is an independent oil and gas production and development company focused in the Asia-Pacific region.

The price came off a lot recently because production at Montara was halted with the expectation of recommencing within four weeks.

It took almost exactly that, and production resumed on 4 July.

However, the company acquired an interest in the North West Shelf, with an effective date of 1 January 2020.

These assets are expected to generate $40 million of EBITDA in 2023 assuming a realised oil price of $100.

There’s also potential to add incremental reserves through infill drilling.

Here’s the chart:

The issue here is that the stock runs up too quickly.

When this happens, traders look to bank and provide supply at the breakout price.

It’s why I like stocks that have long and shallow bases. Low periods of volatility often see greater volatility once the range expands.

For now – I want to see what happens.

But 110p is the place to go long if the price consolidates before first.

Positives:

  • Uptrending chart above the 200 EMA in a weak market
  • Strong fundamentals and growing

Negatives:

  • Can sell off quickly if there is a small production blip
  • SETSqx traded so not easy to get in or out

Dr. Martens (DOCS)

These shoes are no longer for skinheads.

Apparently, they’re now fashionable, which is probably why I don’t own a pair.

And if I extrapolate how many people in Soho wear them to the rest of the country, then maybe I should be filling my boots (sorry, couldn’t resist).

The issue here though is that whilst I have scuttlebutt that these shoes are popular, and we have confirmation in the RNS, there is little edge to be gained in a £2.5 billion company.

It was a gift from private equity, and surprise surprise, the stock tanked not that long after listing.

But things appear to be turning around.

Market expectations were upgraded and several metrics are going in the right direction.

The chart also looks better.

It looks to me like a scruffy cup and handle.

However, the stock is still below both of the 200 moving averages (EMA and MA).

I’m interested in this stock because of the pattern, and how the stock has found support twice at the 50 EMA.

Positives:

  • SETS traded
  • Expectations upgraded
  • Next earnings event is November so low reporting risk

Negatives:

  • Fashion is fickle but this is a short term trade
  • Below the 200 EMAs
  • Stock has been weak until recently and this is a weak market
  1. Kistos (KIST)
  2. Ocado (OCDO)
  3. Restaurant Group (RTN)

Kistos (KIST)

Kistos is Andrew Austin’s new venture.

Well, I say new, but it listed in November 2020.

And it’s done fantastically well since.

The IPO price was around 100p and it current trades around 400p.

I turned down the IPO, and traded the breakout at 200p.

I’m now looking to buy if the stock goes through its all time high.

Gas prices are rising and therefore Kistos is in a sweet spot.

Here’s the chart.

Source: SharePad (1 month free data worth £69 here)

This is a textbook stage 2 stock.

It’s above the 200 EMA and has a reason for the move.

I like this stock and will trade it if it breaks out.

You could’ve said months ago that the stock had a reason to move and you’d be sitting on dead money.

This is why buying a the point of least resistance works best for me.

Positives:

  • Stage 2 uptrend
  • Gas prices have risk to the upside

Negatives:

  • SETSqx so can be illiquid
  • No guarantee of higher gas prices

Ocado (OCDO)

Ocado is an online grocer.

It did spectacularly well during Covid.

But ever since the start of 2021 it’s fallen nearly -75%.

What’s incredible is that the company decided to raise money the week before last.

Now, if I was the CEO and my company’s stock was frothy, I know what I’d be doing: raising as much money as possible.

If the company had decided to take advantage of market hype when the price was 2800p, even if it could only raise at 2000p (a steep discount) that would’ve still been nearly 3x the current price.

Of course, it’s easy to say in hindsight.

But it’s not as if it was a secret that the market was on fire.

When that happens, it’s a good idea for companies to capitalise and bolster the coffers.

For whatever reason, Ocado didn’t.

And it’s also trading around strong support.

When the Kroger deal was announced in 2018 the stock opened at 700p, then squeezed over 1000p as shorts rushed to cover.

Here’s the chart.

The stock bounced off 700p recently.

I’ve marked this area as support and if the stock breaches it I’d like to go short.

Positives:

  • Downtrending in a weak market
  • SETS traded so better liquidity

Negatives:

  • Just raised capital so no urgency to raise

Restaurant Group (RTN)

Restaurant Group owns Frankie & Benny’s, Chiquito, and the Wagamama brands.

I intensely dislike this stock, mainly because of F&B’s. It’s truly awful.

It’s not exactly high class food either, so it’s exactly in the firing line for those looking to cut back.

Here’s something I found interesting in the AGM trading update.

Source: SharePad (risk-free trial and 1 free month on me here)

The company has a covenant of minimum liquidity of £40m.

The current cash position is £220m which is great.

But long-term borrowings is £318m – so it’s not net cash.

Couple that with a forecast PE of 19 that makes for an expensive stock.

I shorted this at 60p already but I’m now looking at 40p as another level.

It’s a significant area of support – and everyone is going to be watching this.

The stock may have no issues this summer as everyone has a last hurrah before they bunker down for winter.

But there’s been no shortage of signs that people are already spending less in restaurants and eating out.

If I was a big time hedge fund instead of some dude pressing buttons at home, this would be a stock I’d want to investigate.

Plus, the trend is already in favour.

I think it’s worth keeping an eye on this company and I’ll be looking to get short if the stock breaks that 40p support.

Positives:

  • SETS traded
  • Going with the trend
  • High earnings multiple

Negatives:

  • Already fallen a lot
  • Strong cash position
  1. Petra Diamonds (PDL)
  2. Atome Energy (ATOM)
  3. CentralNic (CNIC)

Petra Diamonds (PDL)

Petra Diamonds has been a feature here before given that it had been building an extended stage 1 base.

The stock is now firmly off the lows which tells me it’s now likely to be in a confirmed stage 2 uptrend.

The fundamentals for this company continue to improve, with the diamond price remaining elevated.

Here’s the chart:

Source: SharePad (1 month free data worth £69 here)

Zooming out the fall is even steeper.

We have to remember that due to the recapitalisation of the business this effectively wiped the previous equity owners out, so it’s unlikely the price will ever reach anywhere near those highs.

But looking closer, I’d like to re-enter this stock if it takes out the recent high at 135p.

Positives:

  • Stage 2 uptrend
  • SETS traded so can place orders onto the book

Negatives:

  • Still a lot of debt (though this is coming down)
  • A potential falling diamond price damages the fundamentals

Atome Energy (ATOM)

Atome Energy is a new list which, unlike most new lists, is actually positive.

According to the company’s website, it’s the first green hydrogen and ammonia production company listed in the UK market. It’s a spin-out from President Energy.

I missed a breakout trade in the stock recently as my alert went off and I decided not to trade it as it looked illiquid and therefore no driver for volatility.

For a few day, it seemed like I’d made the right decision. Then the stock shot up +50% in three sessions!

I’ve marked the arrow where my alert went off.

The top line marks where I’ve made a new alert.

Note the stock is still above the 50 EMA and is nicely above all of the moving averages.

It’s showing strength despite the overall market taking a pounding.

Positives:

  • Uptrend in a weak market
  • Sector first which can excite buyers

Negatives:

  • SETSqx so can be illiquid
  • No revenue

CentralNic (CNIC)

CentralNic is involved in domain name services and strategic consultancy.

What that actually means I don’t claim to have any idea – but the recent RNSs have been interesting.

Source: SharePad (risk-free trial and 1 free month on me here)

The company is starting to grow rapidly through acquisitions but also organically.

Organic revenue is up c. 53% and the company is profitable. 

It’s trading on a PE of around 8 despite the growth.

Here’s the chart:

A break out 150p sees the stock move into all-time highs.

Notice how the price has battled with the 200 EMA but trading above it. This is a sign of strength and that this support is holding (for now).

I think it’s worth keeping an eye on future RNSs from this company and I see this as a potential breakout trade.

Positives:

  • SETS traded
    Profitable and growing
  • Low earnings multiple

Negatives:

  • Steep pullback from highs
  • Choppy price action
  1. Deliveroo (ROO)
  2. Brave Bison (BBSN)
  3. Pebble Beach (ADF)

Deliveroo (ROO)

Deliveroo – or Deliveroops as it was known when it first listed due to its flop – is a company of which I’m a regular customer.

I hate going into physical shopping stores, and between a big shop from Tesco and the speedy top ups from local express stores through Deliveroo, I’m thankfully never dragged to one by Mrs Taylor.

But the mark-ups here are insane. It’s actually way cheaper to go out to eat than eat in (assuming you don’t overdo it on the drinks).

Someone looking to cut back who sees Deliveroo appearing on their bank statement nearly every day will start to question it.

There is an argument that as Deliveroo takes a percentage cut from the total order that its revenues will actually increase as supermarkets and restaurants put their prices up.

But that also means the price through Deliveroo will also rise more in proportion to the actual cost rises.

Obviously, the best time to short this stock was near 400p, and not when it’s taken a near 75% bath to 103p.

But I like the chart here, and 100p is also a big round number.

These are always key levels as they’re psychologically strong.

Obviously, if the market was efficient then big round numbers wouldn’t be a thing, but the market is not efficient, and so big round numbers are a real thing.

I’ll be looking to get short if it breaks through 100p.

Source: SharePad (1 month free data worth £69 here)

It’s a classic stage 4 downtrend, so I’d be trading with the trend.

At a market cap of £2 billion, it’s also nice and liquid so you can get in and out with relevant ease.

Positives:

  • Stage 4 downtrend
  • SETS traded so can place orders onto the book

Negatives:

  • Revenues growing quickly still
  • May’ve missed the easy short trade already

Brave Bison (BBSN)

Brave Bison is a stock that has been through a carousel of boards all of whom were useless (in terms of creating shareholder value; I assume they were useful at something, at least).

However, the company now appears to be turning itself around.

It’s made an actual profit for what I believe is the first time ever.

It’s also been a cash generator and bolstered the coffers by +75%.

Source: SharePad (risk-free trial and 1 free month on me here)

The new chief executive (and who I assume is his brother) own 22% of the stock – so they’re surely motivated to drive returns in the business.

There is, of course, the issue of directors having too much stock. But I don’t see that being an issue here as they’ve proven with the acquisition of Greenlight that they can do value accretive transactions.

The company also acquired another business last week for a £350k EV that generated a profit before tax of £310k. On the face of it, the deal looks attractive.

Let’s take a look at the chart.

I’d be interested if the stock can break out, and this is a stock I intend to do more research on. I’ve bumped it up my priority list.

One thing to be aware of is that there is a potential seller. I’ve noticed that often on good results the stock rallies and pulls back on heavy volume.

Last week was no exception.

Positives:

  • Strong director ownership
  • Profitable and cash generative
  • Seller could be artificially depressing the price

Negatives:

  • SETSqx so highly illiquid
  • Execution risk on the buy and build

Pebble Beach (ADF)

I was sure I had traded this company before when it came up on my filter.

It turns out I did – I made over 200% in a single day when the company was no longer going to go bust.

Source: My Twitter

That was over four years ago now, and the company has come a long way.

It’s now a £16m market cap company (although I don’t know how much dilution it needed to get there).

The company develops and supplies automation products for TV broadcasters and TV service providers.

It has an impressive client base across the world, and churn is low due to the high quality of its offering.

I was interested in learning more about this company, but my emails were ignored. So it’ll only ever be a small trading chip!

That said, the chart looks interesting, like an early stage 2 stock.

We can see that the spike in April 2018 when the RNS was announced that the company was no longer going bust.

Given that this was near the all-time low and I was the first buyer on the bell (it didn’t gap up), it’s quite possible I actually paid the lowest price ever in this stock.

It’s done well since, generating multibagger returns from the lows.

The stock is now rangebound from July 2020 and trading sideways.

I’d be tempted with a long should the stock break out from 14p and intend to keep an eye on the next set of results.

  1. Bushveld Minerals (BMN)
  2. FTSE 250 (MCX)
  3. Facilities by ADF (ADF)

Bushveld Minerals (BMN)

I’ve taken a starting position in Bushveld Minerals. Why? The fundamentals have changed significantly and the price has not.

Now, there is never any guarantee that the disconnect closes but my belief is that ferrovanadium will continue to rally and drag Bushveld’s price with it.

If you’ve been around a while then you’ll know that Bushveld had a huge rally in 2018 only to come back down to earth with a bang.

Basically, for whatever reason, the commodity went from $22 to as high as $128 in less than a year.

Naturally, when the commodity a stock produces more than quintuples, then the stock will often follow.

I traded Bushveld several times as it was showing all the signs of a stage 2 stock.

But again, for whatever reason, the price of ferrovanadium collapsed and so did Bushveld.

Here’s the chart:

 

Source: SharePad (1 month free data worth £69 here)

Notice how the recent price action shows signs of heavier volume.

And ferrovanadium is on the move too at $62 – levels not seen for over three years.

Bushveld is increasing its production of vanadium too – and at these levels it’s delivering strong cash flows.

The company is aiming to produce between 4,200 and 4,400 mtV for 2022, with the production goal rising next year to around 5,000 mtV as described in the interim results.

Production cash costs for both Vanchem and Vametco were $30.6 and $24, so at these levels Bushveld has a healthy margin.

I’m looking to add to my position on the breakout at 15p.

Positives:

  • Looks like an early uptrend
  • Fundamental strength with risk to the upside on ferrovanadium prices

Negatives:

  • Already a tight market – reduction of supply could see demand destruction
  • Reliant on a high ferrovanadium price

FTSE 250 (MCX)

This is the first index to be featured in Buy The Breakout.

The FTSE 250 contains more domestic companies and less commodity companies. It’s more of a bellwether for UK stocks, I believe, as the FTSE 100 is heavily weighted towards stocks like BP and SHEL.

I’ve noticed that on the FTSE 250 the 200 EMA has historically been support.

We’re trending below that now.

Source: SharePad (risk-free trial and 1 free month on me here)

If the FTSE 250 rallies towards the support-turned-resistance, I’d wait for the stock to get above it then open a small short.

The advantage of shorting an index is that you can the short exposure yet the risks are much lower. For example, if you’re short a company and a bid comes in, or a piece of sector news comes to lift the stock up, you can be on the wrong side of a big move quickly.

By shorting the index, you’re shorting a basket, so this risk is mitigated.

I’ve not much of an indices trader, but I noticed that instead of shorting 30+ stocks in the Covid crash, I could have added to my returns greatly just by shorting the FTSE 100/FTSE 250.

So I now watch the main indices each night just to see if the chart ever looks ripe.

Buying above the resistance means I’m closer to the point at where I’m wrong – the danger zone.

Positives:

  • Small spread
  • Decreased risk of getting stung

Negatives:

  • Not reliant on any one stock
  • No idea what drives the FTSE 250

Facilities by ADF (ADF)

Facilities by ADF is one of the few recent floats that has come strong out the blocks.

The company is a provider of premium serviced production facilities to the UK TV and film industry.

By hiring out facilities it provides its services to some of the world’s biggest traditional and on-demand content production companies.

The client list is relatively prestigious (although this is a vanity metric – big names don’t always pay well and on fair terms): Netflix, Sky, BBC, ITV, Disney, HBO, and Apple, amongst others.

However, it’s a strong chart:

I’d be interested in taking a small long position for a trade if the stock can break out of the 83p level.

I’ve not yet researched the company in huge detail, but I’ve added the company to my watchlist having spotted the chart.

Positives:

  • Already uptrending
  • Trading ahead of expectations as per recent trading update

Negatives:

  • It’s SETSqx so market maker driven
  • Recent float so untrustworthy
  1. Dekel Agrivision (DKL)
  2. Pharos Energy (PHAR)
  3. Shorting punter favourites that will need capital

Dekel Agrivision (DKL)

Dekel Agrivision has featured in Buy The Breakout before. But the buy case has now materially changed and the stock is right below resistance.

Therefore, I’m including it again so it’s on your radar.

I’m long this stock having bought last week, and the reason for this trade is simple.

CPO prices.

These are pushing close to €1,800 – double Arden’s forecast for the year of €900.

With prices starting at €1,242 in the year my belief is that Dekel Agrivision is on track to beat these forecasts comfortably.

It’s true that the international CPO price is not the price that DKL gets.

However, the drivers for palm oil are clear.

The lack of sunflower oil supply from Ukraine has sent buyers to panic buying palm oil instead.

And even though the CPO market is almost 4x bigger than the ~$18.5 bn a year sunflower market – the key is that 75% of the world’s supply comes from Ukraine.

That means there is now a huge deficit in the market.

This is Economics 101.

Supply and demand.

When supply tightens, demand must increase.

Dekel is already trading on an expected EV/EBITDA of 4.8.

It’s growing, and the chart is now backtesting a breakout.

Basically, we’ve had a year of consolidation for the placing to digest.

Anyone who took the placing and wanted to sell has had plenty of time to do so.

Plus, there was a record volume day last week and the number of shares swapping hands is still high.

I am long and hopeful we see a breakout and a trend begin.

I could be wrong, but with the stock being cheap and there now being a material driver I think the risk/reward strongly favours the upside.

Positives:

  • Clear uptrend
  • Fundamental strength

Negatives:

  • Illiquid
  • Reliant on a high CPO price

Pharos Energy (PHAR)

I don’t know much about this company other than it operates in some exotic locations: Egypt, Vietnam, and Israel.

Most of the company’s revenue comes from Vietnam.

However, this to me would be a pure chart play.

The stock is breaking out of a long base built in 2021.

If the stock retraces, then you can get a far better trade entry than you can on the breakout.

Why?

Because buying the breakout retrace means you can buy closer to the danger zone.

The danger zone is the point at which we’re wrong on the trade.

Think about it.

If you buy at 30p (OK – only amateurs buy round numbers but bear with me) and your stop is 27p that means you’re risking 3p on the trade.

But what if you’re buying at 28p and your stop is 1p?

That means you’ve just decreased your risk by 66%.

And you’re getting more bang for your buck.

This is why you absolutely should be looking into the breakout retrace if you’re trading breakouts.

I don’t hold but it’s worth keeping an eye on.

Positives:

  • SETS traded
  • Strong oil and gas prices

Negatives:

  • Poor history
  • Operates in far away places

Shorting punter favourites that will need capital

Any stock that isn’t cash generative is reliant on funding.

And that funding is entirely dependent on sentiment.

When market sentiment drops, companies find it difficult to raise money and generate interest.

Naturally – when everyone is having fun and stocks are going up – companies don’t have any issues.

But spook the market and suddenly this is a problem.

Even though that the market has fallen – if you know a company needs cash then shorting it can be a good strategy.

However, most of these companies can be promotional.

So be careful.

All a stock needs is one good promotional RNS to get a spike.

If you’re going to short stocks like this then you need to keep an eye on liquidity.

And if you have any good short ideas – message me!

Positives:

  • Catalyst for price to move down
  • When punters get scared they all run for the exit

Negatives:

  • Most of these stocks are illiquid
  • One promotional RNS can cause a spike
  • Some punters will never sell which sees prices stay elevated
  1. The Works (WRKS)
  2.  R. E. A Holdings (RE.)
  3. OnTheMarket (OTMP)

The Works (WRKS)

The Works is an omnichannel retailer with its main presence in the UK. It sells books, jigsaws, and a whole range of other stuff that’s always reduced.

You never know what you’re going to get in The Works, which I suspect is part of the magic. It’s a treasure trove of goodies – a bit like the middle aisle in Aldi where you could find almost useless garden tools or a brand spanking new coffee machine at 50% off.

The company has been on my radar since November 2020.

It put out a great RNS in the backdrop of an uncertain environment.

The stock saw a quick jump and rally, but notice how the volume was much higher after the RNS than before it.

This was a sign of interest from other players in the market.

Since then, the stock has been in a stage 2 uptrend, offering plenty of breakout trades on the way.

I’m now looking for another trade here on the breakout of 52-week highs.

The stock recently posted an update where the company announced it’s trading ahead of expectations and pre-pandemic levels.

That last part is key.

The stock was a dumpster before the pandemic – so has something changed?

If the business is ahead of what it was doing prior to the pandemic, then there could be more to come from The Works.

The stock gapped up on that recent trading update and the price has stayed elevated.

So regardless of what I think, it’s clear the market is taking a view on this.

I think there could be another trade once the stock breaks out of that 73p high.

Stocks are for buying and selling, and that’s all I’m interested in for The Works.

This is not a high-quality business. It’s unlikely it ever will be.

But if the setup presents itself then I’ll trade it.

Positives:

  • A clear stage 2 uptrend
  • Stock trading ahead of expectations and pre-pandemic levels
  • Relatively strong balance sheet with no funding required

Negatives:

  • It’s a retailer that struggled pre-pandemic – what has changed?
  • Reasonably illiquid

R. E. A Holdings (RE.)

R E A Holdings cultivates palm oils in Indonesia with the production of crude palm oil (CPO) and crude palm kernel oil (CPKO).

It’s a company similar to Dekel Agri-vision (DKL) but unlike DKL which is trending sideways, RE. is already on the move.

Here’s the chart.

We can clearly see the stage 4 downtrend, transitioning into a long stage 1 base, before breaking out and beginning its ascent into a stage 2 uptrend.

This is why zooming out on the chart to see the bigger picture is always helpful. Small moves that look significant are shown to be noise in the grand scheme of things.

Here’s the base in more detail.

The stock traded sideways for well over a year, and prior to breaking out it was trading above all moving averages.

I should’ve done better here, because my alert for the breakout went off and I didn’t trade the stock because the spread was too wide.

The stock is up over 100% from this level and recently we’ve seen a pullback.

I’ve not looked too deeply into the company but CPO prices are significantly higher (which is also why DKL is on my watchlist).


The company logged average CPO selling prices of $696 in 2020 in the half-yearly report from last June.

Prices are currently in the $1,000-$1,200 range and so I would expect EBITDA to be significantly higher.

As for profit, it doesn’t matter to me.

The stock is clearly moving because of a catalyst. Whether the stock is profitable or not isn’t what’s important.

Remember what Paul Tudor Jones said: “At the end of the day your job is to buy what goes up and sell what goes down, so why does anybody give a damn about PEs?”

Paul Tudor Jones has done all right for himself. So I think I’ll listen!

Positives:

  • Cup and handle forming
  • SETS traded so can leave orders on the book

Negatives:

  • Operates in a faraway land
  • Reliant on high CPO prices

OnTheMarket (OTMP)

I’m pretty sure OnTheMarket featured in January 21’s Buy The Breakout.

And I’m still waiting for it to hit break out of its range.

Here’s the chart.

We can see it’s spent the entire year going nowhere.

This is why you need to have a damn good reason for buying stocks that haven’t broken out.

If you bought it in January 2021, you’ve now been holding it for an entire year, are probably bored to tears, and had your capital tied-up.

Timing your buys is important. Buy too early and you could be sat waiting around or even lose money because the stock isn’t a high probability setup.

It’s far better to buy right than buy cheap.

I know this triggers lots of people but in trading, you need to remove yourself from your emotions and commit to something that works.

And look, if you’ve found buying stocks that are going nowhere works – great! Keep doing it. I’m not telling people what they should do. I’m simply sharing my opinion and what works for me.

I’ve been hugely critical of OTMP in the past (and for good reason).

But with the new chief executive a turnaround has well and truly begun.

Average Revenue Per Advertiser is growing, as is traffic visits and average monthly leads. This should help with the declining number of average monthly advertisers listed.

If enough people check the OnTheMarket website, then this increases the attraction for listings.

And more listings brings more people checking the website, which again sees even more attraction for listings.

It’s a flywheel that works well – if the company can grow it without burning through cash for marketing.

The company’s cash position has actually increased to £10.7 million from £8.7 million – which suggests this is not the case.

That said, what matters to me is the chart.

I’ll let the analysts do the number crunching and I’ll buy the breakout.

Positives:

  • Cash flow positive
  • Green shoots appearing

Negatives:

  • SETSqx traded so illiquid
  • Reliant on a vibrant housing market – are people still willing to sell after the Stamp Duty holiday ended?
  1. Harvest Minerals (HMI)
  2. FTSE 250 UCITS ETF

Harvest Minerals (HMI)

Harvest Minerals is a Brazilian remineraliser company that produces a product called KP Fertil.

KP Fertil has shown to be a cost effective and superior alternative to fertiliser in various tests and is certified by the Brazilian Ministry of Agriculture, Livestock, and Supply (MAPA).

This is the gold standard and back in 2018 it was expected that this would open the floodgates to sales.

The problem was these sales didn’t materialise.

Around that time, the company raised money at 18p on the basis of a 50kt order of KP Fertil.

I entered this stock in a prior placing at 10p and liquified my entire position into the liquidity created from the MAPA certification news above 20p.

I believed that the company would need to place in order to ramp up production.

At the time, this seemed a fair price backed heavily by Brian McMaster.

But the sales didn’t appear and the price started a long fall.

I’ve marked an arrow from the day of the placing.

It also appeared that despite Brian’s vote of confidence, he was able to recoup this plenty of this investment through excessive consulting fees paid directly to his company.

Nice work if you can get it!

Unlike other stock commentators who get paid by the company, I don’t accept money from anyone which means I’m free to say anything I like.

And the truth is I don’t trust Brian McMaster.

Not only has he been earning a handsome wage for not delivering but the expectations set by the company were so out of whack with the reality delivered that it’s difficult to believe a word he says.

On a recent podcast, he’s suggesting that in 12 months the company could potentially be paying a dividend.

The problem is we heard that four years ago.

And whilst it’s fair to say that the company lost a year due to a Covid still the trust is now non-existent.

The good news is though that this is reflected in the share price and offers a potential opportunity.

The market was heavily excited about the 50k order at 20p yet Harvest announced in October 2021 that it had beaten its 80kt sales target two months ahead of schedule.

Here’s the chart from the start of 2019.

The stock fell 90% from the placing at 18p but since then has built a base.

The stock has now pushed through into prices not seen since 2019.

I’m long a small position here because I see this as a significant breakout.

McMaster says that no placing is needed (although I can’t reconcile that statement with the accounts) and that the company is profitable at 40kt of product sold.

I would expect this to be cash earnings and net profit, but McMaster has said the company is targeting at least 100kt next year with the official numbers due to be confirmed this month.

The product sells at 200R$ per ton.

100,000 tonnes is $3,548,618 in revenue.

Looking at the 2020 income statement, I struggle to see how even at 100kt the company will be profitable.

The gross margin is 63.6%.

Apply that to 100kt and we get $2,256,921.

If we assume all costs are the same and don’t increase (unlikely) then that leaves the company loss-making by more than $2 million.

This contrasts quite differently to McMaster’s own words: “We’re selling in excess of breakeven [40kt]. We’re making profit. Full stop.

He also says that it’s difficult to get a true picture of how the company is performing from the audited accounts, so who knows?

Maybe I’m wrong here as McMaster did say only last month that the company doesn’t need funding, but I think there is a placing risk here.

I’m long because of the chart but I think caution is needed.

Don’t forget the currency risk either as the Brazilian Real Harvest operates in has performed poorly against the US Dollar that the company reports in.

Positives:

  • A simple product that is dug up and bagged
  • Over a 100 year life of mine at 400kt of production
  • The company is making inroads with increasing sales

Negatives:

  • Board that has failed to deliver what it promised
  • Executive Chair that can’t lose due to remuneration
  • Potential placing coming

FTSE 250 UCITS ETF

You’re probably surprised to read about an ETF in a trading article.

But I’ve had a few questions recently regarding funds.

Personally, I don’t buy funds.

I prefer to actively manage my own capital.

But if I wanted to outsource my investing, here’s what I would do.

  1. Open a Vanguard Stocks & Shares ISA
  2. Buy FTSE 250 UCITS ETF
  3. Consider buying S&P 500 UCITS ETF
  4. Drip feed through direct debt all year with my ISA allowance

These funds charge low fees because they’re passive.

That means you’re not paying someone a high fee for them to mostly fail to do the job they’re supposed to do and beat the market.

It’s odd because financial services seem to be the only place where you can fail and still get paid well.

That’s because so many people want to beat the market, they’ll take the risk and pay a lot to try and do it.

But the best thing to do is not to buy actively managed funds but to just buy trackers and sit tight.

Back in 2008, Warren Buffett made a $1m bet that over ten years the Vanguard S&P 500 index fund would beat a portfolio of high-cost hedge funds picked by Ted Seides.

Seides conceded defeat a year early – here are the results.

Not a single fund bested the index.

Buying your own stocks is fun. But buying your own stocks takes time.

Owning a tracker fund is less time-consuming, less stressful, and potentially the more profitable option for some people.

How to find the best stocks to invest in right now?

To understand the best UK stocks to invest in we need to understand that there are two markets in the UK.

There are FTSE stocks (Main Market) and also the Alternative Investment Market (AIM).

Main Market stocks have tighter regulation and can be considered safer, but this can be a hindrance for growth. This market contains the largest companies in the UK and these tend to be companies with strong business models and established cash flows. Stamp Duty is paid on Main Market stocks.

The market capitalisation for companies on AIM tends to be much smaller as these are typically small-cap companies. Retail investor accounts are more attracted to these because of the higher upside. However, these companies often do come with high risks.

Here is a company that was a successful investment from its IPO: Fevertree.

Source: SharePad (risk-free trial and 1 free month worth £69 through me here)

Fevertree is an asset-light company because it’s a brand. The company outsources all of its production and instead invests capital in marketing and selling the product.

This means that there are no large capex expenditures on purchasing and maintaining machinery and profits were reinvested for growth.

We’ll look at finding hidden winners later on in this article.

Should I invest now?

Investing is a long term business and the best time to start was yesterday. However, the next best time is now to give yourself as much time in the market as possible.

That said, investing depends entirely on your own personal financial situation and goals.

If you might need the capital within five years, then investing may not be suitable for you. This is because financial markets including stocks can go up and down. Needing to withdraw the money when the market is weak could mean you get back less of what you originally invested.

Many markets can appear overvalued and make it difficult to commit.

One way of getting around this is to use a method called ‘Dollar Cost Averaging’.

What is Dollar-Cost Averaging?

Dollar-Cost Averaging is an investment strategy whereby investors divide up the total investment across a specific period of time. This has the advantage of reducing volatility on the investment.

For example, if we were to buy a stock all in one go and then the stock fell -20%, we would not be able to take advantage of the dip.

However, if we used dollar-cost averaging, then we’d be buying the stock every month regardless of the stock’s price and smoothening our average.

Dollar-Cost Averaging is effective for long term investment strategies such as committing a portion of your salary to the stock market. It means you don’t need to time the market because every month you’re investing the same amount of money. 

Dollar-Cost Averaging is popular with index tracker fund ETF investors.

How to find stable investments?

Investing in stocks can be a tricky business. This is because there are an endless amount of mistakes one can make if you don’t know what you’re doing.

However, we can reduce our investment risk by finding stable investments.

One of the big problems with investing in popular growth companies is that the businesses are often not profitable and also reliant on external cash injections through placings

By avoiding these companies, we dramatically increase our chances of success in the stock market because we are removing one of the biggest risks.

In order to find stable investments, we need to:

  • Check the company’s balance sheet
  • Check the company’s cash flow statement 
  • Check the company’s income statement

Checking the company’s balance sheet

The balance sheet tells us all about the company’s financial health. Buying companies with strong balance sheets and avoiding balance sheets that look like a car crash is one good way to avoid underperforming companies.

Of course, there will be some companies with poor balance sheets that have exceptional stock price performance, but this does not mean they are stable investments. 

Companies that had strong balance sheets coming into the Covid-19 pandemic did not need to raise as much (if any) new capital by selling shares. Uncertainty was reduced in these businesses because they didn’t need to rely on external funding to survive.

Greggs was awash with cash before the crash and so whilst the stock price suffered a sharp drop, it recovered quickly and pressed onto new highs. It was a Covid-19 winner making new all-time highs.

Source: SharePad (risk-free trial and 1 free month worth £69 on me here)

Understanding a balance sheet is key to finding profitable investments. Here’s my walkthrough on knowing your way around a balance sheet

Checking the company’s cash flow statement

You may have heard the saying: “revenue is vanity, profit is sanity”. Often with this phrase, the last (and most important) clause is left out: “cash is reality”.

Profits are easy to manipulate and do not represent cold hard cash in the bank. 

The cash flow statement of a company describes how cash moves through the business and how much cash the company is burning/generating through the course of its operations, investments, and financing. 

You can go through my cash flow statement tutorial here.

Checking the company’s income statement

The company’s income statement shows the financial performance of the company. It details the company’s revenues, costs, and profits (or lack of profit).

As I said earlier, profits are easy to manipulate and management can make these numbers up at their own discretion through the use of their depreciation and amortisation policies. Revenue recognition can also play a part in the final bottom line number, as well as putting costs onto the balance sheet (otherwise known as a capitalised cost). 

For example, there is one mining company that is listed on the UK stock market that has claimed exploration costs as an intangible asset.

I would say that it has spent millions on drilling holes into the ground with nothing to show for it, but management believes that this is somehow an asset. This means the cost doesn’t go through the P&L on the income statement and instead sits on the balance sheet. 

How to determine a profitable investment

There is no crystal ball that tells us which stocks are profitable investments.

But here is a checklist of some of the things that I look out for when investing. r, we can use a checklist to give ourselves the best chances of success. 

  1. Does the company have management with skin in the game?
  2. Does the company have a moat that protects it from competitors?
  3. Can the company scale and grow bigger?
  4. Is the company reliant on large key customers?
  5. Does the company have a strong balance sheet?
  6. Is the company actually profitable?

Does the company have management with skin in the game?

Put simply: if a company’s directors have no interest in buying shares then why should I?

Directors that buy large amounts of stock themselves in order to make a profit from the company’s stock price going up is always interesting to me.

That’s because it’s clear that our interests are aligned in wanting the share price to rise rather than using the business as a lifestyle.

That said, directors can also award themselves generous options packages and say they’re “aligned”. But it’s never the same as putting money on the table and getting skin in the game. 

If directors aren’t buyers at all then think twice before you become one. 

Does the company have a moat that protects itself from competitors?

A solid investment needs a moat that can protect itself from investors. An economic moat, as coined by Warren Buffet, offers a competitive advantage in business from its competitors. Imagine a castle as the business, and the moat protects the castle. 

For example, The Coca-Cola Company’s moat is their flagship brand Coca-Cola and its entrenchment into almost every society and social culture. 

Apple’s economic moat is its innovation and ability to continuously see what the consumer will want and create it before they know it, as well as its ecosystem which hooks people in with its ease. They did it with the iPhone. They did it with the iPod. The chances are that Apple will do it again!

High margin businesses often attract competitors due to their potential to make plenty of money. 

A company with a high margin business and no economic moat will see those high margins deteriorate and eventually be eroded by competition. 

Economic moats are important because without one there is nothing to stop competitors coming in to steal market share. 

This happened to Safestyle UK, a company that was involved in the manufacture, sale, and installation of plastic windows throughout the UK. They were highly profitable and made a lot of money, until a competitor realised that they could do the same too! Safestyle’s share price plummeted because they did not have an edge over the competition.

If we invest in a company that does not have this moat then we leave ourselves wide open to attack.

Is the company able to scale and grow bigger?

This point is often overlooked by private investors yet it is of paramount importance. 

If a company cannot scale and grow bigger then where are those future growing profits going to come from? A company can increase its profits by cutting costs, but that is limited. There is no limitation on how big a company can grow.

We can look at a company’s potential growth by looking at how much market share they have, how big the potential market is, how big the potential market can grow. We can look at overseas markets and look at if the company could grow there.

Another way to look at a company is operational gearing. This is where a company benefits from fixed costs regardless of revenue. This could be a pub chain that has to pay the rent on the leases regardless of custom coming through the door. It could be a technology company, which has a fixed cost platform irrespective of how many users are signing up. 

Whilst operational gearing is fantastic when plenty of punters are coming in through the doors and users are signing up to a fixed cost platform en masse, we must be careful because operational gearing is a double-edged sword and works both ways. If the pub chain is struggling and revenue is in decline it must still pay the rent on the lease. Likewise, the tech company still needs to support its platform otherwise it will lose all revenue!

Companies that benefit from operational gearing can also see margin improvement too. We calculate margins by taking the profit (revenue minus costs) and dividing this by the revenue. 

A company turning over £1,500,000 on a fixed cost base of £1,000,000 is making £500,000 on a margin of 33.3%. If that company was to grow their revenue to £2,000,000, an increase of 33.3%, they would actually increase their operational profit by 100% going from £500,000 to £1,000,000! Furthermore, their margins would also increase from 33.3% to 50%.

A company that can scale and that can grow bigger can continue its growth for many years and see dramatic appreciations in its share price.

Does the company have steady recurring revenue or is the company at risk of large revenue loss?

When investigating a company we should always look at the company’s revenue source and potential pitfalls. A company that has recurring revenue has the revenue streams already onboard, which can be projected into the future. The revenue that is recurring will only leave should the company no longer provide an adequate service for their price or compared to competitors.

Companies that rely on certain clients for a large percentage of their revenue are at risk should that client terminate or decide not to renew that contract. The client can even go bust and leave the company with a liability, as they have done the work but not collected the cash.

I warned on this about a company that signed up a large contract. It failed to collect the cash and went bust in less than six months after this tweet.

It is not necessary to have a recurring revenue business model. Companies can do very well providing a repeated service to customers over several years, for example support services companies. However, it is necessary for us to be aware of the risks of large clients for the company. We can check detailed descriptions of the revenue breakdown in the Annual Report.

Does the company have good assets or a strong balance sheet?

Companies that have weak balance sheets or poor assets leave investors at risk of being out of pocket. Balance sheets are covered in Chapter Seven. Weak balance sheets can mean not having enough cash in order to cover working capital, which means the company has an unexpected cash call where they are not able to function in their day-to-day operations. It can also mean they are laden with debt that they might struggle to pay off if they were to lose a client from the business. Remember, if the owners of the debt want to recall their borrowings, and the company cannot renegotiate elsewhere, the company can go bust!

Poor assets can mean that capital expenditure is required in order to improve them. For example, a restaurant chain’s units may be outdated and deteriorating badly. If the chain does not deploy capital in order to freshen up and improve their units, customers may end up going elsewhere! In the same manner, a software company that has not invested in their platform may have an asset that is now far behind the competition, and will soon no longer provide an edge and become useless.

We should always check that a company has enough cash or cash equivalents to sustain its operations, and always make sure that the company has good assets. 

Is the company profitable?

If a company is not making a profit then it cannot deliver any dividends for shareholders. It is also unlikely to grow sustainably into the future and may be at risk of issuing further equity and diluting shareholders.

Some companies like to make it harder for us to see if they are profitable or not. For example, a company with a £9 million loss may then dispose of an asset for £10 million. This would mean the company would report a profit of £1 million despite the fact that the asset sale has nothing to do with their core business. If this asset sale was a one-off sale and therefore exceptional, the company’s real bottom line was a £9 million loss! 

It’s not enough for us to just look at the bottom line (profit). We need to look higher and see how that figure was reached. Companies that capitalise costs (put costs onto the balance sheet rather than through the income statement), and companies that make non-recurring asset sales for cash, can all report a profit and give a false picture of the true state of the business.

What are the safest shares to buy

The safest shares to buy are often stocks that meet the checklist above. 

This is just a general checklist and you can create your own, but profitable companies that have strong balance sheets and an economic moat, are able to scale and don’t have significant customer risk, that are run by management with skin in the game often outperform stocks that don’t.

Look for shares that also have a strong Return On Capital Employed (ROCE).

You can think of ROCE as the company’s own interest rate. It’s the rate of return that the company received on capital employed within the business. 

ROCE looks at the company’s capital efficiency and a high ROCE ratio is a typical trait of a successful stock. 

It’s worth noting that there are many subscription services out there that claim to be able to tell you the best stocks to buy if you only sign up for a monthly fee.

The reality is companies such as The Motley Fool UK rely on these subscription fees to make money, and not by investing in the stocks its writers pick. 

You should also be careful of share advisors and stockbrokers. Personally, I find it difficult to see how an Independent Financial Adviser (IFA) can be independent when they make a commission selling a certain product. I’m sure many IFAs are reputable and do have their clients’ best interests at heart but it is something to be wary of.

Should I invest in more stocks

I’m no financial adviser and so I can’t offer advice. 

However, my opinion is that you should assess your own financial situation.

The stock market should be viewed with a timeframe of at least five years and more – therefore if there’s a chance you need the money before that time period then you shouldn’t invest.

But over the long term, the stock market compounds wealth and will continue to do so if you believe that the economy will always grow and prosper over the long term.

The best shares will be able to navigate any economic environment and any short-term setbacks can provide a timely opportunity.

There will always be booms and busts – hence the long term mindset required to ride out the troughs and profit on your investments. 

How many shares should a beginner buy

Many beginner investors often get the terms stocks and shares confused. This is understandable because even the UK government calls the investment ISA a “Stocks & Shares ISA”.

Stocks is the plural of a company’s stock – meaning that if someone has invested in three stocks then they have three separate investments.

However, if someone says I have three shares, what they should mean is that they have three shares in one company. 

I believe that for beginner investors who don’t want to invest in low-cost passive index tracker funds then 10 stocks is a good number to aim for an investment portfolio.

This is because having 10 different investments diversifies your portfolio and reduces your individual company risk.

For example, if one company has a profit warning or issues other bad news, then the stock’s share price will likely fall in value. But if you have 9 other companies, this diversification reduces the total downside across your account.

10 companies also gives enough diversification against sector risk – unless all 10 of your stocks are in the same sector!

Where should I invest my money now

I’m not a financial adviser and can’t offer advice. Firstly, because it would be illegal. And secondly, I have no wish to have any responsibility for your investment portfolio.

However, the companies I’m investing in today are companies that have strong macroeconomic tailwinds. They have strong balance sheets and are solid investments.

Become a better trader with SharePad. Find out the best stocks to buy using SharePad’s highly analytical fundamental and technical suite. Claim your risk-free trial and 1 month free (worth £69) on me here.

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