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Earlier this week, I asked ChatGPT a simple but important question: what are the 10 best UK shares to invest in right now? I wasn’t looking for short-term trading ideas or speculative punts. The aim was to identify a balanced group of UK-listed businesses that could deliver a mix of dependable income and long-term growth.
It’s worth noting that this list is more indicative of how ChatGPT works than a definitive list of shares to buy. I’ll break down why seemingly smart ‘insights’ often miss critical nuance.
Predictable choices
Admittedly, ChatGPT made a good effort at diversification. Avoiding a single theme or sector, it spread risk across healthcare, financial services and consumer goods. That gave me reassurance, as a long-term portfolio needs resilience, not just high yields.
As expected, household names featured prominently. GSK was chosen as a core income option, offering an attractive dividend backed by cash-generative pharmaceutical operations. Its recent restructuring has helped sharpen focus on core strengths and its balance sheet is improving.
Similarly, AstraZeneca appeared as a classic growth-leaning holding. Its modest yield is supplemented by a strong drug pipeline and global footprint promising long-term growth.
Two of its more questionable choices included Diageo and Ocado Group, two beaten-down companies with uncertain futures. Lloyds and Unilever were obvious choices, albeit somewhat uninspiring and, once again, it named ‘Royal Dutch Shell’ (despite the company changing its name years ago).
It also picked BT Group and Next but made one surprising choice I’d not heard of — Treatt (LSE: TET). This unusual inclusion prompted me to dig deeper.
A niche operator
Treatt’s a specialist manufacturer of natural flavours and fragrances used by global food, beverage and consumer goods companies – an appealing niche. Demand for natural ingredients, clean-label products and premium tastes has been growing steadily, driven by changing consumer preferences rather than short-term economic cycles.
As a result, Treatt benefits from long-term structural trends rather than relying on fleeting fashions.
Another key attraction is the quality of its customer relationships. Treatt typically works closely with blue-chip multinational clients, embedding itself deep within their supply chains. These long-standing partnerships create high switching costs and give revenue a level of predictability that’s unusual for a company of its size. That stability supports consistent cash generation.
Another key attraction is the valuation. The stock’s trading at 53.9% below fair value using a discounted cash flow (DCF) model. On top of the growth potential that implies, it has a 3.88% dividend yield, adding appeal to income investors.
However, there are some risks. Such a small stock is at high risk from volatility and even a small earnings miss could send the price tumbling. It also means it’s more exposed to input cost inflation, currency movements and the execution risk of its expansion strategy.
Final thoughts
I like that ChatGPT went out on a whim and chose a stock I hadn’t heard of. It gives me some insight into how it works and makes me question my own analysis techniques.
However, I don’t see a huge advantage for Treatt over other similar small-cap dividend stocks. Maybe AI knows something I don’t but, in my opinion, I won’t consider buying Treatt shares right now. But my interest is piqued – and I’d be more than happy to see myself proven wrong.
