I think some of the best shares to buy now are value stocks. I reckon these investments will benefit from the double tailwind of earnings growth and valuation expansion as the UK economy reopens.
As such, here are two such investments I’d buy for my portfolio today.
Best shares to buy now
At the top of my list of cheap value stocks is NatWest Group (LSE: NWG). Formerly known as Royal Bank of Scotland, the company is one of the UK’s largest banks.
I think this means it could generate significant returns as the UK economy recovers during the next few years. The enterprise has weathered the pandemic incredibly well. It’s now set to exit the crisis with a stronger balance sheet and more scope for growth.
The company’s stronger fundamentals also hints at the potential for higher dividends. According to one City analyst, the five largest UK banks, including NatWest, could pay out as much as £7.6bn in dividends this year, which would be the highest since the 2007 peak of £13.bn.
Of course, this isn’t guaranteed. However, I think this estimate shows the bank’s potential and that of its peers.
Key challenges the company will have to overcome in the years ahead include ultra-low interest rates. These are set to hold down profit margins. Rising costs could also become an issue as NatWest faces a higher tax bill.
Despite these challenges, I’d add the business to my portfolio of value stocks, considering its discounted valuation (P/B of around 0.6) and income potential.
Another company that sits on my list of the best shares to buy is Severfield (LSE: SFR). At the time of writing, this stock is trading at a P/B value of 1.3 and a P/B multiple of 10.3. I think both of these metrics look cheap compared to the company’s potential.
Indeed, City analysts are forecasting strong earnings growth at the structural steel producer over the next two years as it benefits from the infrastructure and building boom sweeping the UK economy. Analysts forecast earnings growth of 22% for its current financial year, and an increase of 12% in 2023.
While these are just estimates at this stage, the company’s recent comments suggest that management is expecting growth this year. The company’s full-year results release for the period ending 31 March noted that a robust order book “supports continued growth throughout the 2022 financial year.“
Meanwhile, it also noted business activity is “very encouraging” for the year ahead, and there’s “positive momentum” across the group.
Based on these comments, I think the value stock deserves a place on my list of the best shares to buy now. Further, I’d buy the investment for my portfolio based on its growth prospects and valuation.
That said, this positive momentum may not continue. Higher commodity prices may weigh on profit margins. In addition, the rising costs of dealing with pollution may also eat into profit margins. These additional costs could ultimately impact growth.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.