The current bear market has created a world of opportunity for eagle-eyed investors. A lot of cheap stocks are trading way, way below what I think they are really worth.
These two excellent companies trade on a price-to-earnings (P/E) ratio of below 7 times. Let me explain why I’d buy them today and hold until the end of the decade.
Working it out
Budget retailer TheWorks.co.uk (LSE: WRKS) faces considerable uncertainty in the near term as shopper spending power plummets. GfK data last week showed consumer confidence slumped to record lows in a worrying omen for future revenues.
Margins at the business are also under threat from rising product, shipping, energy and labour costs.
I’m still thinking of buying TheWorks shares though. As someone who invests for the long term, I think there’s a lot to be excited about here. Consumer demand for value was already rising sharply in the years before the cost-of-living crisis. Current economic conditions have speeded up this consumer trend too.
Moreover, the arts and crafts retailer also stands to benefit handsomely from Britain’s rapidly growing army of hobbyists. Market rival Hobbycraft’s decision to open three new stores underlines the huge potential of this market.
As I said earlier, at current prices, TheWorks now offers terrific all-round positives that I find hard to ignore. The company trades on a forward P/E ratio of 5.6 times.
Meanwhile, forecasted dividends — payouts that are covered a healthy 2.2 times by anticipated earnings, incidentally — create a giant 8.2% dividend yield.
Home comforts
Inland Homes (LSE: INL) is another dirt-cheap share I think warrants serious investor attention. The housebuilder currently trades on a forward P/E ratio of just 6.3 times.
The main threat to the sector is a powerful and prolonged rise in inflation. In this environment the Bank of England (BoE) could continue aggressively hiking rates to ease the pressure. The central bank hiked its consumer price growth inflation again this month (to a jaw-dropping 11%) in a sign of the growing strain.
In this environment, homeowner affordability will come under increased pressure. This, in turn, could hit demand for Inland Homes’ properties hard.
Encouragingly though, demand for residential property continues to surge despite rising BoE rates. This fills me with a lot of confidence. There are a number of factors that could keep newbuild home sales rising strongly too. Insufficient numbers of existing properties entering the market is one.
So does the fact that the BoE’s benchmark rate remains well below levels before the 2008 financial crash mean mortgage rates will remain historically cheap? Intense competition among lenders is also helping people get on the property ladder.
Several government initiatives should also support profits growth at Inland Homes and its peers when Help to Buy ends next March. This includes the Deposit Unlock programme that means buyers will only need a 5% deposit.
