As a value investor hunting cheap shares, I have three goals. First, as Warren Buffett suggests, “to buy a wonderful company at a fair price (and not a fair company at a wonderful price)”. Second, to invest at prices with potential for future capital gains. Third, to generate a rising passive income from cash dividends.
Two cheap shares getting cheaper
In this scary world, I aim to invest in the cheap shares of ‘BBC companies’: Big, Beautiful and Cautious businesses. Big means FTSE 100 members, Beautiful means global leaders, and Cautious means reliable, familiar enterprises. The share prices of two leading BBC businesses keep falling, which should be helpful for me as a prospective buyer.
BP: Bounce-back Potential
Over the last 30 days, the cheap shares of BP (LSE: BP) have been the FTSE 100’s worst performers. They are down almost a seventh (13.9%) in a month. Also, BP’s share price has almost halved over 12 months (crashing 44.8%) and three years (slumping 45.3%). In April 2019, the BP share price was above 570p. Today, it trades at under half this level, hovering around 269p. BP’s profits have been crushed by falling demand due to Covid-19. Also, as an old-economy company selling polluting fossil fuels, environmentally conscious investors shun BP stock.
However, BP has been around since 1908 and I expect it to evolve to cope with the next 113 years. Furthermore, the Brent Crude oil price has recovered from below $16 on 22 April 2020 to $63.35. Today, the oil price is more than a tenth (10.7%) higher than it was a year ago. With BP generating enormous cash flows in this improved price environment, I think its cheap shares could rebound. After all, the share price has fallen 40p in a month, which looks like a good entry point to me. That’s why I’d happily buy BP stock today. Of course, if oil demand weakens and prices fall, BP will suffer, but that’s a risk I’d be willing to take. Meanwhile, I can collect chunky dividends in the form of a 5.6% dividend yield.
Unilever: cheap shares?
Like BP shares, the share price of Unilever (LSE: ULVR) has struggled over the past month. Having dropped by almost a tenth (9%), Unilever shares are #95 in the FTSE 100 performance ranking over the past 30 days. Unilever’s share price is also down 15% over one year, but is up 3.5% over three years and has risen more than a third (36.4%) over five years. Even after recent drops, I wouldn’t exactly call these cheap shares, but that’s because quality costs a little extra. And Unilever is a company I have grown to admire hugely over nearly 35 years as an investor.
Why would I happily invest in Unilever today? First, the Anglo-Dutch giant is a world leader in selling fast-moving consumer goods. Every year, billions of us buy its brands for our kitchen and bathroom cupboards. With a market value of £104.1bn, Unilever is a global giant in the sales of cleansers and hygiene products, personal-care goods, and food and snacks. In 2020, Unilever’s share price peaked at 4,944p on 14 October. Four months later, it has dived by almost £10 to 3,979p. For me, that pushes Unilever into the ‘cheap shares’ bargain bin.
Of course, its post-Covid performance could disappoint, but I trust its management team to deliver long term. And Unilever’s 3.7% dividend yield is the icing on the cake!