While many dirt-cheap shares have failed to recover even in the recent stock market rally, the prices of gold and Bitcoin have soared. They have made strong gains as investors have sought alternatives to equities in a world economy that continues to face significant levels of uncertainty.
However, with the prices of the precious metal and virtual currency being high (despite Monday’s Bitcoin price dive), their scope for further growth may be limited. As such, buying undervalued shares today could be a more profitable move ahead of a likely recovery in the world economy.
The appeal of dirt-cheap shares
The idea of buying dirt-cheap shares is relatively simple. It has been a successful way of getting high returns for many years. After all, buying an asset for less than it is worth can offer scope for big capital growth.
Clearly, some shares are priced at low levels because they are weak businesses. For example, they may have high levels of debt or lack a competitive advantage. That means they are less likely to benefit from a long-term recovery. However, those businesses with a strong market position and sound finances, but facing tough operating environments, could be worth buying while they trade at low prices.
Buying undervalued shares in the FTSE 100
At the moment, a number of dirt-cheap shares can be found in the FTSE 100. The index has thus far failed to recover to its record high – even after the recent stock market rally.
As such, companies such as Shell trade at attractive prices. The oil and gas major has a dividend yield of around 4% following its 40% share price fall in the last year. But its financial performance could improve significantly due to a likely global economic recovery that pushes resources prices higher. Meanwhile, its plan to pivot to low-carbon assets may provide a growing bottom line over the long run.
WPP is another dirt-cheap share in the FTSE 100 that could deliver improving performance after its 25% decline in the last year. The advertising business has improved its financial position and is aiming to simplify its business model to become more efficient. Its reliance on global business confidence and investment could mean it is a major beneficiary from a recovering world economy.
Taking a long-term approach
Of course, dirt-cheap shares such as Shell and WPP are unlikely to bounce back in a matter of weeks. They could take many months, or even years, to deliver on their full potential in a recovering world economy.
However, through building a portfolio of high-quality businesses when they trade at cheap prices, it is possible to generate high returns in the coming years. This could improve an investor’s long-term financial prospects, and help them to achieve financial freedom as the stock market recovers.