In a tumultuous month for global stock markets, May turned out to be a real roller coaster. Earlier in May, even cheap shares dived as the US market swooned. And yet by the end of the month, when the dust cleared, stock prices were largely unchanged.
For the record, the US S&P 500 index actually gained 0.22 points (0.01%) from 29 April to 31 May, while the tech-heavy Nasdaq Composite index lost 2.1% of its value during May. And in the relative calm of the London Stock Exchange, the FTSE 100 index actually rose by 0.8% last month. And it’s within the Footsie that I’ve been concentrating my search for cheap shares this calendar year.
The Footsie’s risers and fallers over one month
Though the FTSE 100 rose by over 0.8% in May, most of its constituent shares lost value over the past month. Of 100 Footsie stocks, 41 rose, with gains ranging from 14.7% to 0.1%, with the average rise being 4.9%. Meanwhile, 59 shares lost ground over 30 days, with losses ranging from 0.4% to a hefty 24.9%, for an average decline of 8.3%. And it’s among these losers and laggards that I’ve been hunting for cheap shares that I don’t yet own. Here are two I’d buy.
These two slumped shares look cheap to me
Close to the very bottom of the FTSE 100’s biggest losers over the past month lie these two beaten-down stocks. After recent slides in their share prices, I see these two shares as too cheap right now:
| Company | #98: B&M European Value Retail | #99: Aviva |
| Sector | Retail | Financial |
| Share price | 383.7p | 428.7p |
| 12-month change | -31.6% | -21.1% |
| Market value | £3.8bn | £12.0bn |
| Price/earnings ratio | 9.1 | 51.5 |
| Earnings yield | 11.0% | 1.9% |
| Dividend yield | 4.3% | 6.8% |
| Dividend cover | 2.5 | 0.3 |
The first of my two cheap shares is B&M European Value Retail, a variety discounter operating over 700 UK stores. Its shares plunged almost 15% on Tuesday, following disappointing full-year preliminary results that revealed falling revenues, profits and earnings per share. Once viewed as a great growth stock, B&M now resembles a value share to me.
Granted, B&M’s financial performance will take a knock in 2022, hurt by red-hot inflation. Even so, its dividend yield of 4.3% a year is covered 2.5 times by 2020-21’s earnings. Even if 2022-23’s results are weaker, this cash yield looks fairly solid to me. And that’s why I’d buy B&M’s cheap shares today — while hoping that 2022’s weakness is a mere blip.
The second of my cheap shares is another household name: insurer and asset manager Aviva. What draws me to Aviva stock is its market-thrashing dividend yield of 6.8% a year. The FTSE 100 index has a cash yield of under 4% a year, putting Aviva shares among the top FTSE 100 stocks for yield. However, this cash outflow isn’t covered by last full-year earnings. That said, earnings are set to rebound this year to comfortably cover the next round of cash payouts.
There’s much for an investor like me to worry about, of course. We have war in Ukraine, soaring inflation, rising interest rates, slowing economic growth and Covid-19. Yet I still believe that buying cheap shares in solid companies will produce decent returns for me in the long run!
