The new month brings with it a pay day and some extra cash that I can use for investing. With some leftover cash from last month as well, I’m looking at buying some cheap shares with £600. Even though I like to include stocks for income and growth as well, my focus here is on value stocks.
Time to think
The first option I’m thinking about is Watches of Switzerland Group (LSE:WOSG). The luxury watch specialist has endured a tough time over the past year, with the share price down 39%.
The stock took a large, single-day fall back in January when it issued a revenue warning. It said that revenue was expected to be between £1.53bn and £1.55bn, compared with an earlier forecast of £1.65bn–£1.70bn.
It blamed it on “challenging macro-economic conditions (that) impacted consumer spending”. I completely get this, given the tough time we’ve had here in the UK recently.
Yet looking forward, I think we’re over the worst of it. Interest rates are expected to start falling in August. The general election is fuelled around how to get the economy going again, with fiscal boosts likely coming in some form.
With the current share price situation, the price-to-earnings ratio sits at just 8.05. This flags up as undervalued in my book.
So although this might take some time to play out, I’m thinking about buying the stock. If the UK economy recovers in coming years, I expect the share price to also move higher as demand returns.
Finding the real value
Another option I like is Supermarket Income REIT (LSE:SUPR). The stock is down 7% over the past year. Some might look at this and say that it’s not a huge move to represent a cheap share.
However, things get more interesting when I consider the difference between the share price and the net asset value (NAV). As the trust owns and leases out property (no surprises in guessing that it’s mostly supermarkets), there’s a tangible value of what the business owns. This is the NAV.
In theory, the share price should match the NAV over time. Back at the start of the year, the share price and the NAV were basically the same. Yet now, the stock trades at a 16% discount!
This is usually down to weak investor sentiment about the firm. Yet from what I can see, there’s nothing that really jumps out to me as being a red flag. That’s why I think this could be a great value stock that should recover in value back to the NAV.
Of course, a risk is that the NAV declines, maybe due to lower property values or tenant defaults. This would hurt performance and is something I need to be mindful of.
I’m seriously thinking about allocating £300 to each stock as I believe both are currently trading at an undervalued price.
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Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
