I believe many London-listed equities are currently profoundly undervalued. As such, I think now’s an excellent opportunity to buy a basket of cheap UK shares. I reckon I could generate high returns in the years ahead by doing so.
So, with this in mind, here are the five cheap UK shares I’d buy today to take advantage of this theme.
Cheap UK shares to buy
When looking for cheap UK shares to buy, I’m not only interested in companies that look cheap on a historical basis. I’m also interested in businesses that look undervalued based on their growth potential in the years ahead.
In my opinion, one of the best ways to evaluate a company’s growth compared to its valuation is the PEG ratio. This ratio compares future earnings growth to a business’s current price-to-earnings (P/E) multiple.
Two of the cheapest blue-chip stocks on this metric are Antofagasta and Smith & Nephew. The former is a large copper miner, which should benefit from the increasing demand for the metal in the years ahead. Based on current analyst growth projections, the stock trades at a PEG ratio of 0.4.
Meanwhile, medical technology company Smith & Nephew has seen a decline in the demand for its products this year as routine operations have been put on ice due to the pandemic. However, this isn’t expected to last. Analysts are forecasting a rapid recovery in 2021 and, based on these projections, the stock is currently dealing at a PEG ratio of 0.6.
Income and growth
Other cheap UK shares to appear on my radar include the university accommodation provider Unite. Shares in this company have fallen around 20% over the past year. However, after these declines, the stock is selling at a price-to-book (P/B) ratio of just 1.2. According to my research, that’s a significant discount to its long-term average. The shares also offer an attractive dividend yield of 3%.
Automotive distributor and retailer Inchcape may report a near-70% slump in earnings for 2020. But the City is forecasting a rapid recovery in 2021. Based on current figures, the stock is trading at a very cheap PEG ratio of 0.6. I think that looks too good to pass up, especially considering Inchcape’s growth track record. Profits have more than doubled since 2014. Therefore, I believe now could be a great time to snap up this mid-cap growth champion at a discount.
Finally, I’m optimistic about the outlook for S4 Capital. The company, founded by former WPP CEO Sir Martin Sorell, has gone from strength to strength over the past few years. Any usual basket of cheap UK shares might exclude this business because it looks expensive on a P/E basis.
However, after including the group’s projected growth in the valuation, the stock looks far too cheap. With earnings projected to nearly double in the next 12 months, the stock is dealing at a PEG of less than one. As such, I’d consider buying this business as part of a diversified portfolio of cheap UK shares.