The idea of me buying a ‘cheap’ UK stock now is that over time, it should return to a fair value. In effect, if I can purchase something for less that it’s actually worth, I should be able to make a profit when others realise the correct value. The beauty (and difficulty) of the stock market is that there isn’t an exact science of identifying a cheap share.
However, here’s how I identify such stocks and a few that I believe are undervalued now.
Tools to sift through the market
One barometer I use to try and filter for a cheap stock is the price-to-earnings ratio. This measures the current share price relative to the latest earnings per share. The lower the ratio, the more likely it is that the share isn’t fairly priced. A rough guide of a fair value is a P/E ratio of 10.
There are currently 24 stocks in the FTSE 100 with a ratio below this mark. This is a large number, but I need to appreciate that this year has been a tough one for stocks globally. With investor sentiment not great, it does make sense that share prices of some companies have fallen drastically.
Another tool I use is the percentage price movement over the past year. I’m trying to identify companies that have lost at least X% in value over this period. Obviously, some stocks might have crashed for valid reasons that I need to discount. But I’m going to find cheaper stocks by looking at share price losses rather than identifying those that have rallied hard.
Stocks I like now
Barclays (LSE:BARC) is a major international bank, with divisions spanning retail, corporate and investment banking. The share price has fallen by 15% this year, with a current P/E ratio of 4.12.
The business has endured a tough year, with a trading error causing a loss in the hundreds of millions of pounds. However, Q3 results showed a 17% rise in income versus the same quarter last year. Higher interest rates are helping the bank, something that I feel could continue into next year.
M&G (LSE:MNG) is an investment manager. It currently has a low P/E ratio of 4.06, with the share price down by 6.6% over the past year.
A key element for the success of the company is attracting new money, from which it can then generate fees. In its half-year results, it said that “in only 12 months, we have reversed our position from being £2bn net client outflows, to achieving £1.2bn in net client inflows excluding Heritage”. I feel that if the business can continue to attract cash, profitability should take care of itself in years to come.
A risk for both financial stocks is what could happen with an aggressive recession next year. This could hurt Barclays via loan and mortgage defaults. For M&G, investors might pull out their money in fear and hold it in cash.
But I still feel both are strong options for me. When I have more free cash in January I’ll be considering adding these two stocks to my portfolio.
The post I’m looking for cheap UK stocks. Here are two I like right now appeared first on The Motley Fool UK.
Should you invest £1,000 in Barclays right now?
When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Barclays made the list?
See the 6 stocks
setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#FFFFFF”, ‘color’, ‘#FFFFFF’);
})()
More reading
3 of the safest dividend stocks on Earth
These are the 3 cheapest FTSE 100 stocks. Are they buys for 2023?
Best British growth stocks to buy for December
2 high-yield shares I’d buy now
FTSE 100 stocks in focus: should I buy Barclays with a P/E of just 4.2?
Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays Plc. 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.