There are still a number of cheap stocks available to buy after the 2020 market crash. Despite this, finding them could prove to be a difficult task.
Therefore, looking in industries that face uncertain near-term prospects could be a sound move. It may enable an investor to unearth a range of high-quality businesses that trade at low prices.
Through analysing their financial positions and market opportunities, it may be possible to build a portfolio of undervalued shares that produce impressive returns in the long run.
Searching for cheap stocks in unloved industries
Many shares have rebounded following the market crash. Yet some sectors still contain a large number of cheap stocks. In many cases, they are industries likely to be among those hit hardest by the weak economic outlook. For example, industrial businesses that are relatively cyclical could suffer. And consumer goods companies that are reliant on consumer sentiment may post disappointing financial performances in the short run.
As such, there may be an opportunity for long-term investors to buy undervalued shares while they face a difficult outlook. Yes, this strategy may mean that an investor experiences paper losses in the short run due to ongoing risks such as the coronavirus pandemic. However, over the coming years, many unloved companies operating in sectors that are currently out of favour among investors could produce impressive returns. As such, buying them today may prove to be a profitable long-term move.
Analysing potential purchases
Of course, not all cheap stocks are worth buying at the present time. Some companies are priced at low levels for very good reasons. For example, they may have weak balance sheets that are unlikely to withstand a prolonged period of poor sales growth. As such, they may deserve to trade at low prices to reflect their higher risks.
Analysing not only the financial positions of potential purchases, but also their market positions, could allow an investor to find high-quality companies trading at bargain prices. Purchasing those companies with sound balance sheets and wide economic moats may lead to a greater benefit from a likely economic recovery. They may be able to extend their market influence at the expense of weaker peers. This may lead to higher profitability in the long run that has a positive impact on an investor’s portfolio.
A second market crash
Clearly, some investors may be dissuaded from buying cheap stocks today because of the threat of a second market crash. Since that outcome is a known unknown, it is difficult to try to time the market to take advantage of it.
Therefore, buying undervalued shares today could be a sound move. Their valuations may already price in a disappointing economic outlook and the threat of a market downturn. While paper losses cannot be ruled out in the short run, their capital gains over the long run may prove to be very impressive.
