I think there’s a bit of a misconception that large FTSE 100 or FTSE 250 stocks cannot offer strong returns to an investor like myself. Sure, most won’t exhibit the wild day-by-day swings of some AIM penny stocks or Bitcoin, but this doesn’t mean I can’t necessarily double my money over the course of a year or more. For example, there were eight FTSE 100 stocks that I could have bought a year ago that would have delivered 100% returns. These cheap UK stocks at the time would have made for a good investment back then. But what about now?
Learning from past examples
If I’m trying to target cheap UK stocks now, then a good start is to look at the characteristics of stocks that were cheap and have now doubled in value. The eight stocks I mentioned actually sit in several different sectors.
Anglo-American, Glencore and Antofagasta are examples from the mining and commodity space. This area has seen a large share price increase over the past year. This has been partly down to movements in commodity prices.
However, there has also been significant volatility along the way. I think back to this time last year when oil briefly dipped into negative territory for the first time ever. Such volatility will always be in play when buying stocks in this area, and is a risk I need to remember.
Another area that included cheap UK stocks a year ago but that rose in the subsequent 12 months was ‘stay-at-home’ companies. These included Kingfisher and Entain. Kingfisher operates DIY and hardware stores, and with lockdown, a lot of us took on such projects. Entain owns online gambling brands, which also performed well with us all stuck at home.
Trying to find cheap UK stocks now
What can I learn from the past performance of those companies? One lesson is that investors moved funds to reflect what was going on in the UK economy (such as lockdown). In the coming year, it looks like reopening stocks could outperform. Given that some have been ignored in the past year, I think this area offers cheap UK stocks right now.
For example, I wrote a piece this week running through Grainger, a FTSE 250 stock. It’s a large UK residential landlord, reporting results next week. If the company is seeing increased rental demand, and has a positive outlook in this regard, I think that it could look to double in price as investors sell out of ‘stay-at-home’Â stocks and move to reopening ones.
Another lesson from the past year is that indirect factors such as commodity prices can have a large positive impact on the share price performance. I personally don’t think that commodities will see a big rally in 2021, and given the already strong moves seen in the stocks mentioned above, I wouldn’t invest.
However, I think an external factor such as demand for Covid-19 vaccines is something that could act like a commodity. In this way, I think AstraZeneca could benefit. If GlaxoSmithKline also successfully markets a vaccine, I feel this could be a stock to buy that looks relatively cheap at the moment.
Weighing all my options, I’m looking to buy Grainger shares after results next week as my next stock purchase. And I’m considering buying AstraZeneca as well.