The prospect of buying dirt-cheap UK shares may not seem appealing at first glance. After all, many investors have been more focused on purchasing fast-growing companies that often trade at high prices over recent months.
However, there may be more scope for capital gains among cheaper shares because they trade at lower prices. They may also have more potential to benefit from a likely stock market recovery over the coming years.
Therefore, while they can be risky and may not necessarily post positive gains in future, buying high-quality companies at low prices could prove to be a sound strategy at the present time.
Scope for capital gains among dirt-cheap UK shares
Even after the recent stock market rally, it’s possible to purchase a wide range of dirt-cheap UK shares. Many sectors have yet to fully recover after the 2020 market crash, which is often reflected in their valuations.
Buying any asset at a cheaper price may prove to be favourable compared to purchasing it at a high price. It means there could be more scope for capital growth. Of course, some companies may be priced at low levels because they face weak outlooks. Therefore, it’s always important to build a diverse portfolio of stocks rather than being dependent on a small number of companies through which to generate returns.
High-quality companies trading at low prices
Many of today’s dirt-cheap UK shares are companies with strong balance sheets and wide economic moats. This may mean they’re undervalued, since they could have the capacity to deliver improving financial performance in a recovering economy.
Buying such companies has often proved to be a profitable exercise. Especially when they trade at prices that include wide margins of safety versus their intrinsic values.
Of course, it’s important to thoroughly check the financial and market positions of any company prior to purchase. Where they appear to have the capacity to produce rising profitability, they could have an attractive risk/reward ratio on a long-term view.
The prospect of a stock market rally
The recent stock market rally may or may not continue. However, over the long run, a rise in the prices of many dirt-cheap UK shares seems likely. After all, indexes such as the FTSE 100 and FTSE 250 have always recovered from their declines to post new record highs.
Although such an outcome is never guaranteed, they have the capacity to offer high single-digit annual total returns over the long run.
As such, buying UK shares when they trade at low prices could be a means of capitalising on the market cycle. This strategy may take time to come good. It may not even work out at all in terms of making a profit. However, it could lead to impressive capital returns in a likely stock market recovery.
