I’m highly excited about the outlook for UK equities. Many London-listed companies are trading at deeply discounted valuations. With the outlook for the economy improving, I reckon there’s a strong possibility these investments could yield large total returns for investors in the medium term. As such, I’m looking to buy a basket of cheap UK shares to profit from the new bull market.
There are a couple of companies that stand out to me as being cheap.
Cheap UK shares on offer
In my opinion, some of the most attractive UK investments can be found in the FTSE 250. Unlike the FTSE 100, these companies are smaller, but that’s not a disadvantage. Smaller companies tend to grow faster than their larger peers. Therefore, I reckon there’s a strong chance they can produce larger returns for investors.
And if investors acquire these stocks at a discounted valuation, they could benefit from both earnings growth and a valuation uplift.
Virgin Money is a great example of the sort of cheap UK shares I’m looking for. One of the UK’s leading challenger banks, the group’s customer base has expanded rapidly in recent years. However, due to the pandemic, the lender has had to write off millions in loans to customers, pushing it into a significant loss. Nevertheless, management is expecting a return to profitability in the next two years.
If the company can hit this target, I think the stock could rise significantly from current levels. It’s currently changing hands at a price-to-book (P/B) ratio of just 0.4. I believe that’s appropriate for a loss-making business, but profitable corporations should trade at or above the value. If Virgin can return to the black, I reckon the valuation may also recover.
Many other financial firms have suffered the same fate as Virgin. I believe several of these may see the same valuation uplift when they return to profit. Provident Financial and OSB are two examples. They’ve reported losses this year but are expected to return to growth in the near term. When owned as part of a basket of cheap UK shares, I reckon these companies could produce large total returns.
Temporary headwinds
I think the best cheap UK shares are those suffering from temporary headwinds. Serco is an example.
This outsourcer has made some mistakes in the past, but management seems to be getting on top of the firm’s problems. Profits are projected to hit £100m this year, up from £50m in 2019. As profits grow, I reckon investor sentiment towards the business will dramatically improve as well.
Dixons Carphone also seems to me to be suffering from temporary headwinds. The company recently embarked on a vast restructuring. It’s planning to close all of its brick-and-mortar stores to cut costs as well as renegotiating contracts with mobile phone providers. This has resulted in losses in the near term. But I reckon it’s a sensible decision that should lead to higher profit margins and more significant profits in the long run.
