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As a lover of value stocks these UK shares have grabbed my attention. But are they brilliant buys or potential investor traps?
Marks & Spencer
The trading outlook for retailers like Marks & Spencer (LSE:MKS) remains highly uncertain as the cost-of-living crisis endures. The amount of money people have to spend on premium foods and on clothing could remain under severe pressure.
But an encouraging response to its revamped clothing strategy provides some reason for optimism. It suggests the retailer may impress even as the broader retail industry struggles.
A customer survey by BNP Paribas named M&S the most improved fashion brand of the past year. It beat rivals including Next and boohoo.com in areas like pricing, quality and style.
The FTSE 250 firm’s latest financials illustrate how much ground it’s made up on its peers. Latest financials showed clothing and homeware like-for-like sales up 8.6% between October and December. As a consequence, market share rose to its highest level for seven years.
Having said all that, I’m not prepared to buy the shares just yet. The company’s recovery plan is making good progress but it has risen from a low base following several false starts.
It will have to keep paddling hard to keep this momentum going too, given the competitive market it exists in. This will suck in vast amounts of capital on marketing and product design that could damage earnings and dividends.
As I mentioned before, the retailer could also struggle to grow sales as high inflation persists. Meanwhile profit margins could be squeezed as labour, energy and product costs keep climbing.
The retailer trades on a forward price-to-earnings (P/E) ratio of 9.9 times. But I’d rather buy other cheap shares for my portfolio today.
Keywords Studios
For instance, I’d prefer to increase my existing holdings in Keywords Studios (LSE:KWS). It doesn’t face the same level of competitive pressures as M&S. And it performs an important function in a fast-growing industry.
In short, this AIM stock offers technical and creative services to the video games sector. These include localising content, providing player support and identifying glitches.
Keywords’ revenues rocketed 34.8% year on year in 2022, thanks in part to growing demand for external software services. And as technology improves and emerging market wealth levels increase, the scope for robust long-term growth here is enormous.
The company is expanding rapidly to make the most of this opportunity as well. It made five acquisitions last year for a total of €140m and has significant liquidity to continue building.
Today Keywords shares trade on a price-to-earnings growth (PEG) ratio of 0.5. A reading below 1 indicates that a stock is undervalued by the market.
Profits could suffer in the near term if gamers cut back on software spending. But its strong long-term outlook, allied with the cheapness of its shares, still makes the tech firm a top value stock, I feel.
