What makes a dirt-cheap UK share? It could be a low valuation as measured by indicators, such as the earnings multiple, dividend yield and price versus asset value.
But dirt-cheap can mean something else as well. For example, many UK companies have seen their revenues and earnings crash because of the pandemic lockdowns. And dividend yields and earnings multiples may look expensive when measured against current trading figures.
These UK shares have burst into life
But damaged businesses often have fallen share prices. And the ‘dirt-cheap’ I’m looking for can be discovered using the same valuation techniques. But I’d apply them to anticipated trading figures rather than historical ones. And the exciting thing now is that the UK and other economies have a clear path out of the pandemic. So many businesses will soon get back to full trading.
Those businesses are likely to see their revenues and earnings rise. And if their shares are still on the floor, there’s a good chance they’re dirt-cheap compared to the earnings they could achieve. And that’s why I reckon fallen, pandemic-damaged shares have recently burst into life. I’m thinking of names like easyJet, Greggs, International Consolidated Airlines and Barclays.
And the UK stock market is a bountiful hunting ground for dirt-cheap shares. Unlike the US market, for example, we don’t have lots of expensive growth stocks. We have some, but not buckets full of them like the Americans do. And on top of that, the UK market has been going through a tough time navigating the uncertainty of the Brexit process. I think the pandemic and Brexit have probably been suppressing company valuations.
Several talking heads in the financial industry and media have been pointing to the UK stock market as a decent play for the recovery. And the main logic is that valuations are lower. That’s certainly true when compared to US stocks, in general.
Funds and stocks I’d target now
One way to play the theme would be to buy exchange-traded UK-focused tracker funds. And it’s a decent option because I can get wide diversification across many underlying businesses. But I’d also focus on the shares of some individual companies and aim to buy at opportune moments.
For example, I could invest in a bank, such as Natwest. And I’m tempted by the housebuilders on the London market, such as Barratt Developments. But I’d sweep my net wider and consider companies such as engineering firm Babcock International. And I’d run the calculator over cinema chain Cineworld as well as many others.
Of course, the recovery from Covid may yet prove to be long and arduous. And businesses may not recover as quickly as I think they will. Investor enthusiasm for the stocks I’ve mentioned here may turn out to be misplaced or too early. Nevertheless, my plan is to buy stocks like these now and hold them for several years so that a full economic and trading recovery can materialise. When businesses are truly back on their feet, I hope their improved prospects will then be fully reflected in their share prices.