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There are a lot of popular UK shares that investors like to buy. Most tend to be within the FTSE 100. And this month, that trend hasn’t changed, at least not according to investors using AJ Bell’s trading platform. Over the last month, it seems the vast majority of British retail investment capital has been concentrated in:
- BP (LSE:BP.)
- Rolls-Royce Holdings
- Shell
- HSBC Holdings
- International Consolidated Airlines
So what’s behind this popularity? And should other investors be considering these businesses as well?
Demand for energy
It’s interesting to see two of the UK’s largest oil & gas shares on investors’ shopping list. And since BP commanded 10% of all Buy trades over the last month, it seems like a good place to zoom in. So what’s driving the seemingly strong investor appetite?
There are a lot of factors at work here. However, it seems the biggest driver of interest is the group’s recently announced strategic reset.
In February, CEO Murray Auchincloss announced that BP will be ramping up its oil & gas investments to $10bn a year while reducing investments into renewables, from $5bn to $2bn. Why? Because in a higher interest rate environment paired with higher fossil fuel prices (due to rising geopolitical tensions), oil & gas is a far more lucrative source of income. And if management’s projections are correct, this pivot could result in adjusted free cash flow expanding by more than 20% per year.
Beyond the business fundamentals, BP shares also generally look cheap. Its price-to-sales ratio sits at just 0.48 – less than half the industry average of 1.1. And with a 6.1% dividend yield that continues to be paid out, it isn’t hard to understand why investor interest is so high.
What’s the catch?
Environmental concerns aside, BP’s future seems to be more secure under this new strategy, resulting in stronger investor sentiment. But even FTSE giants like BP have their weak spots. So what are the risks of investing in this business?
One possible explanation for the stock’s discount is the state of its balance sheet. BP has notably higher leverage compared to many of its peers. As such, management has outlined its intention to reduce net debt from around $26.9bn to a target range of $14bn-$18bn by 2027.
While that’s good news for longevity, it means a larger portion of the group’s profits will be allocated towards debt repayment rather than asset expansion. The higher leverage also makes the business more sensitive to changes in fossil fuel prices since interest payments on loans squeeze net margins. The impact of this is only amplified if BP’s production volumes fall – something that the company recently warned was a possibility in 2025.
The bottom line
While the operating landscape for BP seems to be improving, the company still has a long list of challenges to overcome, particularly when it comes to production and refining margins. So while I understand the sudden surge in interest from investors, this isn’t a stock I’m rushing to buy right now.
As for the other UK shares on this list, each presents a unique opportunity for investors. But as demonstrated with BP, there are also risks that must be carefully considered. Don’t forget, simply following the herd isn’t an intelligent investment strategy.
