The Motley Fool

Here’s why I’d buy cheap stocks right now and hold them to 2025

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Man typing into calculator and making notes
Image source: Getty Images.

Over the next four years, I anticipate adding quite a few cheap stocks, otherwise known as value shares, into my investment portfolio. I already hold a few, such as National Grid and Persimmon, as well as the investment trust, Merchants Trust.

Value shares tend to perform better during any period of inflation

As a general rule, value stocks perform better in high inflation periods and growth stocks perform better during low inflation.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. And if you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio.

Click here to claim your free copy now!

Some experts are warning inflation will exceed 2% by the end of this year. That would be a big rise from now and would likely have an effect on the performance of growth shares versus value shares.

Overall, it’s unclear if, or when, inflation could rise significantly. What is more clear is that cheap stocks are a better hedge if it does occur.

Cheap stocks provide more margin of safety

Given there may be a reversal in the fortune of many growth shares, I’d plump for cheap stocks because there’s a greater margin of safety.

Buying shares with price-to-earnings ratios that are below 15 – a level that is often seen as separating undervalued shares from the rest – offers some protection against any downgrade in outlook or earnings. Shares on sky-high valuations should, and often do, fall much harder on any bad news.

I think Benjamin Graham, the inspiration for legendary investor Warren Buffett, was correct to say valuation and a margin of safety are very important.

Cheap shares have underperformed

Despite the low valuations, cheap shares have underperformed growth shares in the low-interest rate, low-inflation economic conditions we’ve nearly continuously had since the financial crash. The stock market crash of 2020 still means there are opportunities to pick up cheap UK shares. 

For me, the historical underperformance of value shares versus more racy and highly-rated growth stocks isn’t off-putting. While I may add some modestly valued growth stocks to my portfolio, many of my new stock picks over the next four years to 2025 will be cheap stocks.

The thing to watch out for when it comes to investing in cheap shares though is, value traps. This is where a share appears cheap but actually, the valuation is low because the business is worsening. That could well mean that the share price will fall much further. A low P/E doesn’t in itself make a share worth buying. I’d want to get a bigger picture and understanding before committing my money to a value share. 

That’s why I’d make sure to look at revenue and operating profit growth and how a company compares to the competition. I’d also look at whether the industry is growing or facing challenges. There are also many other considerations to take into account but these serve as a starting point. 

The bottom line is, as always, I’ll research shares thoroughly before investing, even if they are a cheap stock.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic…

And with so many great companies still trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool is here to help: our UK Chief Investment Officer and his analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global lock-down…

You see, here at The Motley Fool we don’t believe “over-trading” is the right path to financial freedom in retirement; instead, we advocate buying and holding (for AT LEAST three to five years) 15 or more quality companies, with shareholder-focused management teams at the helm.

That’s why we’re sharing the names of all five of these companies in a special investing report that you can download today for FREE. If you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio, and that you can consider building a position in all five right away.

Click here to claim your free copy of this special investing report now!

Andy Ross owns shares in National Grid, Persimmon and Merchants Trust. 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.