There has been high volatility in global stock markets in the last week as the world digests news of Russia’s invasion of Ukraine. This market volatility provides the perfect opportunity for me to buy financially sound companies at bargain prices to buy and hold for the future. These two cheap UK shares provide this perfect opportunity.
A cheap UK share with strong foundations
FTSE 250 constituent and UK housebuilder Bellway (LSE:BWY) reported promising figures in a recent trading report. Bellway saw a record completion of 5,964 homes in the six months before January 31st 2022, while the average selling price rose by 2.8% to £311,800. It would be rational to expect the share price to have reflected this positive outlook over the last few months, but the opposite has occurred, with the share price down 20% in the last six months.
With the stock trading at a price-to-earnings (P/E) ratio of 8.8 and with a low price-to-book (P/B) ratio of 1.1, I judge the market to have undervalued this FTSE 250 stock. Bellway’s solid and rising dividend of 4.2% and a minimal debt-equity ratio of 4% make me feel even better about these shares.
Another cheap FTSE 250 housebuilder
Vistry (LSE:VTY), another cheap UK-based housebuilder, has performed similarly over the last few months and shares similar strong fundamentals to that of Bellway. A low P/E ratio of 10.5, a P/B ratio of 1 and a strong 4.1% dividend yield indicate to me that the price has further to rise to meet the share’s true value.
Vistry shares fell earlier in the year on the news that housebuilders were going to have to foot the bill of resolving the flammable cladding crisis in the UK, and the stock has never fully recovered. While this will be a considerable upfront cost for the company, it will not impact future finances and I believe that the company should be unaffected in the long term.
Why UK housebuilders?
I believe investors have overlooked housebuilders in the last few years as they turn to flashy growth stocks that promise more than they can deliver. As a result, these companies with strong fundamentals have been shunned by investors and kept at bargain prices.
Demand for housing in the UK has been strong over the last few years as workers work from home more post-pandemic, and it seems resistant to the current impacts of Russia’s invasion of Ukraine. Alongside all this, the Bank of England may scrap affordability tests for mortgages, which could increase the demand for mortgages and housing in the UK and raise house prices further – benefitting housebuilders, of course.
There are legitimate concerns that an increase in inflation would force further interest rate increases and make mortgages more expensive in the UK. If this was the case, house prices would likely fall, and housebuilders would be impacted negatively.
Despite this, I believe the opportunity outweighs the risks of these two cheap UK shares and I’m investing in Vistry and adding to my Bellway position with my next available chunk of savings!