Which UK shares are good value right now?

High inflation and rising interest rates have weighed on stocks for some time. As a result, I think there are some great opportunities for value investors right now.

At the moment, I can buy a 10-year government bond with an annual yield of 3.5%. But there are some UK stocks that I think offer better returns, making the risk a bit higher than the current price.

JD Wetherspoon

Top of my list JD Wetherspoon (LSE:JDW). The shares don’t look cheap – 17p per share gives a yield of 2.8% with the share price approaching £6.

I think the company’s future cash flow will be higher than in 2022. The business as a whole generated £22m in free cash, but this was after spending £85bn on one-off investments.

While I expect JD Wetherspoon to continue to invest, I don’t expect to spend on this scale every year. And without them, the business would have earned around 84p per share – a 14% return on current prices.

I don’t count businesses that reduce their capital investment to zero. I do not think that is either possible or wise on the part of management. But at today’s prices, I don’t think they should.

With shares worth £6, even 25p a year would yield 4%. And I think JD Wetherspoon can do it in the future.

The company’s debt level presents a risk, but investors are starting to appreciate the potential here and the stock is up 30% since the start of the year. That’s why I buy stocks sooner, rather than later.

Lloyds Banking Group

Share on Lloyds Banking Group (LSE:LLOY) looks good to me too. The stock has been caught in the general uncertainty around banking, but I think the price shows look attractive here.

When valuing bank stocks, the usual approach is to take the return on equity the company makes and compare it to its cost of equity – the price-to-book (P/B) ratio. By this metric, Lloyds looks cheap.

The company recently predicted a real return on equity of between 13% and 16% going forward. And with the stock trading at 90% of its actual equity value, the return on investment looks good.

In my view, there are two main risks facing banks today. One is interest rate hikes leading to loan defaults and the other is the possibility of tighter regulations following the recent banking turmoil.

As I see it, the stock price is now priced in both risks. Even if the company’s earnings per share were cut in half, the price would still exceed the 3.5% offered by the 10-year bond.

That’s why I think the stock looks undervalued right now. It’s one that I’m looking to add to my portfolio when the new ISA season comes around.