I like to devote a portion of my investment portfolio to cheap UK shares. Historically, cheap stocks have been shown to outperform the market in the long run, although this isn’t always the case.
Still, even though cheap stocks aren’t guaranteed to outperform, I believe owning them introduces some diversification to my portfolio. As such, here are three cheap UK shares I’d buy today.
Cheap UK shares I like
The first stock on my list is the utility group Centrica (LSE: CNA). This company has suffered some significant setbacks in recent years, but has overcome these challenges.
Over the next few years, I think the company can stage a recovery. After reorganising the operation and selling off non-core divisions, it’s now better placed to make a comeback.
City analysts forecast a net profit of £191m this year, followed by £356m in 2022. Based on these numbers, the stock’s trading on a forward price-to-earnings (P/E) multiple of 8. Based on this valuation, I’d buy the company for my portfolio of UK shares.
But while the stock may look cheap, I think it’s important to keep an eye on competition. Previously, Centrica has struggled to grow as cheaper competitors have stolen market share. This is the most significant risk facing the company today.
Alongside Centrica, I’d also acquire agriculture and engineering group Carr’s (LSE: CARR) for my basket of cheap UK shares. I think the agriculture side of this business is the most exciting.
This division develops and sells a range of branded animal nutrition products. This market is relatively defensive, and demand will only increase as the country’s population and the number of animals required to feed it grows.
The group’s figures for 2020 show the defensive nature of the business. Earnings per share declined by just 3% last year, despite the pandemic.
Right now, the stock is trading at a 2022 P/E ratio of 12.3. It also supports a 3.1% dividend yield. I think these figures look attractive as Carr’s benefits from the UK economic recovery. Considering its growth potential, I think it deserves a higher multiple.
One challenge the company could face is rising costs. Higher input costs in its feed and engineering businesses could reduce profit margins if they can’t be passed on to customers.
The final company I’d acquire for my portfolio of cheap UK shares is bathroom and construction components supplier Norcros (LSE: NXR). With the UK is currently experiencing a building boom, Norcros is reaping the benefits.
According to the City analysts’ projections, which are based on the company’s own forecasts, earnings per share are expected to increase 44% in its current financial year. If the firm hits this target, the stock is currently selling at a forward P/E of 9.
Of course, these are just projections. There’s no guarantee the company will hit this target. Nevertheless, I think they highlight its potential. The stock also offers a dividend yield of 2.9%, at the time of writing.
Like Carr’s, Norcros also faces the challenge of trying to navigate rising costs. These could hold back growth if the company can’t pass them on to consumers, or if rising prices put consumers off buying.
Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Norcros. 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.