Currently, most UK-based shares are trading at a discount compared to 12 months ago; however, some shares are set to continue lower and others I think have bottomed out, with their current prices already factoring in the negative news of this year. Here are two cheap UK shares that I think possess excellent value and have an ability to stage a strong recovery.
Barratt Developments (LSE: BDEV) is a UK-based housing developer that has seen its share price drop from a high of 889p in January to 533p per share as of today. During that period, housing developments and sales halted completely during the UK’s national lockdown, increasing market demand as buyers and sellers both waited to complete transactions. This was reflected in strong selling prices and sale completions from when lockdown restrictions were eased in June. Barratt benefited from this, announcing earlier this month an increase in completions of 24% for the period between July and October, compared to the same period last year. In September fellow Fool Peter Stephens also felt that Barratt shares were cheap then, and that was before the announcement of increased completions. I can only see Barratt’s share price continuing to grow long term as tailwinds such as the government’s Lifetime ISA scheme and the overall lack of affordable housing continue to create demand for Barratt’s products.
Financially, Barratt seems like a cheap UK share that I think is too good not to buy right now. It currently possesses a price to earnings (P/E) ratio of 13 and has a healthy balance sheet, carrying a debt to asset ratio of 0.3, meaning the company has low levels of debt and funds the majority of its operations from equity. Although the current dividend is suspended, if it returns early next year at the previous level, this would result in a prospective yield of 8.7%. If this happens (which I think is likely) I could well be grateful for buying the shares now, as often announcements of a dividend increase result in a positive jump in share prices. For all of these reasons, I think Barratt Developments is a cheap UK share that can only recover in price.
Lloyds Banking Group (LSE: LLOY) is another cheap UK share that I think has been overlooked by investors. With a share price of 29p, it’s currently at one of the cheapest prices it has been in a decade, with 88p being the high in 2015. Not surprisingly, it also has a P/E ratio of just 8. A recent positive for Lloyds was that mortgage approvals reached a near 13-year high in August, although this could in part be attributed to built-up demand from lockdown. Even so, I believe Lloyds is in a strong position as the UK’s largest mortgage lender.
One variable that could affect Lloyds’ share price would be if the Bank of England does decide to introduce negative interest rates in November. Even if it did, I still think Lloyds Banking Group is a cheap UK share I’d want in my portfolio, with an aim to keep long term.