I have an odd personality quirk: I prefer not to buy and own things. For instance, I don’t own a house (but my wife does). Also, I’ve never owned a car (but I’ve driven company cars). Most of my treasured possessions are ancient. For example, I keep patching up my 25-year-old walking boots to keep them going. Thus, when I receive any sudden windfalls, I rarely have any immediate use for them. Generally, I give any spare money to my wife to spend or save, or I invest into cheap shares for a passive income.
I’ll invest £750 into cheap shares
Last weekend, I had a modest windfall when I won $1,000 (over £720) in an online poker game. I decided to round this to £750 to buy cheap shares. As a veteran value investor, I scanned the FTSE 100 index over the past year, looking for laggards. Here are two stocks I like today.
Cheap shares #1: GlaxoSmithKline
I’ve owned a stake in pharma giant GlaxoSmithKline (LSE: GSK) for almost three decades. As my largest personal shareholding, GSK has been a big disappointment of late. Over the past 12 months, GSK has been among the Footsie’s worst performers. In fact, it’s ranked #96 out of 101 FTSE 100 shares since 19 March 2020 (just before the market bottomed on 23 March). GSK is down almost a tenth (9.7%) over 12 months, versus a 30.2% gain for the index. Nevertheless, as a buyer of cheap shares, I welcome the chance to invest after price falls.
At last year’s peak, the GSK share price hit a high of 1,857p on 24 January 2020. On Friday, shares changed hands for 1,299p. That’s a collapse of three-tenths (30%) in 14 months. I know there are worries about GSK’s forthcoming separation into two separate listed companies. And GSK boss Dame Emma Walmsley has hinted that the group will cut its long-established cash dividend of 80p a share.
Even so, I think anxiety about GSK’s future might be overdone. Right now, GSK stock trades on a price-to-earnings ratio of 11.4 and an earnings yield of 8.8%. The dividend yield of 6.2% a year is almost double that of the FTSE 100. With GSK looking undervalued on these fundamentals, I’ll keep buying these cheap shares for a juicy passive income.
A great business at a 20% discount
For the record, 92 of the 101 shares currently in the FTSE 100 index have gained since 19 March 2020. Still, it genuinely surprises me that Unilever (LSE: ULVR) stock is among the stragglers. Shares in the Anglo-Dutch Goliath are down 2.4% over 12 months. At its peak in 2020, the Unilever share price was riding high at 14 October. Today, the shares trade at 3,974p — down 970p in five months. That’s a slide of almost a fifth (19.6%), which indicates to me that Unilever stock may have been dumped in the ‘cheap shares’ bargain bin.
Globally, 2.5bn people use Unilever products each day. And because Unilever is a powerhouse in FMCG (fast-moving consumer goods), its stock generally commands a premium rating. But, like Warren Buffett, I don’t mind paying a fair price to buy into a great business. On Friday, ULVR stock traded on a price-to-earnings ratio of 22 and an earnings yield of 4.5%. The current dividend yield of 3.7% is ahead of the wider FTSE 100. Hence, as a value investor, I’d be happy to buy these discounted shares today!