Buying cheap stocks can lead to fantastic gains in the long run. That’s simply because there is often tremendous scope for a large upward rerating. The problem, though, is in identifying whether a stock is cheap for a good reason and is about to become a whole lot cheaper in the coming months and years.
One company which is cheap and is enduring a tough time at the moment is Santander (LSE: BNC). Its share price has plummeted from 632p to 322p in the last eighteen months as its financial outlook has worsened owing to a poor performance by the Brazilian economy. This is a key market for Santander and further negative or slow growth could cause a downgrade to the bank’s forecasts.
Despite this risk, Santander appears to be a strong buy at the present time. It trades on a price to earnings (P/E) ratio of just 8.5 which, for a major bank which is geographically well-diversified, appears to be a very appealing price to pay. Furthermore, with Santander having bolstered its financial standing in recent years, it appears to be a less risky proposition than previously, with its dividend yield of 4.8% providing additional evidence that its total return could be sizeable over the medium to long term.
Also trading on a low valuation is Centamin (LSE: CEY), with the Egypt-focused gold miner having a P/E ratio of just 12.6. Certainly, the price of gold could come under pressure this year due to pending US interest rate rises which have historically caused demand for gold to fall. However, with Centamin forecast to increase production to 500,000 ounces of gold per annum in the next couple of years, even a disappointing period for the gold price may fail to stop improved profitability for the company over the medium term.
With Centamin’s dividend being covered 2.8 times by profit, it appears to be relatively secure and also offers strong dividend growth prospects. Therefore, while Centamin yields just 2.9%, it remains a relatively enticing long-term income play.
Meanwhile, today’s update from private rented housing sector specialist Sigma Capital (LSE: SGM) was warmly received by the market, with its shares being up by over 10% on the day. The key reason for this is an increase in guidance for the full-year, with pre-tax profit of £2m now due to be delivered.
Looking ahead, Sigma remains well-positioned for 2016 and its work in progress is ahead of schedule. It also plans to begin construction with its second house building partner, Keepmoat. This will increase capacity as well as provide Sigma with access to further land opportunities alongside its current pipeline.
With the company’s shares trading on a price to earnings growth (PEG) ratio of just 0.1, there seems to be further upside potential on offer, thereby making Sigma a strong buy even after today’s double-digit gains.