It is great that stock markets have got some of their mojo back. But a downside is that cheap UK shares are getting harder to find.
Many shares’ prices are either back to pre-pandemic levels or well past them. Even in terms of valuations, as measured by the price-to-earnings (P/E) ratio, they are at high double digits.
But all is not lost as far as bargain hunting goes. I think there are still buying opportunities for me in three kinds of stocks.
#1. Reopening stocks
Not all reopening stocks have been lucky enough to reach pre-pandemic highs so far. An example is the FTSE 250 cinema chain Cineworld, which is still at half its pre-market crash levels.
The challenge with Cineworld and the like is that its financial health is now compromised. But I think that the stock still has good prospects as cinemas have reopened in both its key UK and US markets. Over time, as its performance improves, so can its share price.
The downside here is that it can take time to bounce back. In other words, these stocks are for the long-term investor in me.
#2. Under the radar stocks
There is also a buying opportunity for me in smaller UK shares. Sometimes high-performing companies can remain under the radar for a while before investors catch up to their potential. I like to keep an eye out for these stocks.
One such for me is the FTSE 250 iron ore miner Ferrexpo. When I wrote about it in March, its P/E ratio was 3.6 times. It is at 6 times now, clearly because other investors too saw value in this commodity investment. I still think it is still a cheap UK share, though, with its P/E is still way below that of its FTSE 100 mining peers.
Sometimes there can be a catch to stocks that look good but that have a muted share price. I think is the case for tobacco stocks. Imperial Brands has a P/E of 5.5 times, despite being a profitable company because the future of tobacco is in question. So I consider low priced shares carefully.
#3. Out of favour stocks
Investors tend to favour different stocks based on where we are in the business cycle. During times of economic growth, cyclical stocks like mining, retail, and restaurants tend to perform because consumption is on the rise. This makes them attractive to investors. Similarly, during slowdowns, safer stocks like utilities and healthcare with relatively stable demand make more attractive buys.
With a cyclical upturn underway, safe stocks are out of favour. As a result, they are now available at relatively lower prices. An example is the FTSE 100 healthcare giant AstraZeneca, which is still way below the all-time-highs touched last year. That its Covid-19 vaccination has also been mired in controversy has not helped, and neither has its acquisition of US-based Alexion. But its latest results clearly indicate that it is still a good buy for me for the long term.
