Saying that a stock is cheap can sometimes be a dangerous statement. After all, it might be losing ground because the business is performing badly. In this way, what’s cheap could get a lot cheaper! I want to focus on cheap shares that have a positive outlook. From there, I feel that as people realise this in the future, the stock will move back to a fairer price.
Potentially misplaced concerns
One example I like is Rightmove (LSE:RMV). The share price has fallen by 28.6% over the past year, with 18% of this move happening in just the past month.
The main concern here is the potential issues in the housing market. With interest rates rising, higher mortgage costs might dampen demand for property. This could decrease Rightmove’s revenue streams from agents that list properties on the online portal.
I think the stock is cheap for two main reasons. I feel investors are overly pessimistic about the business. Even if the market for new home purchases slows, rental demand remains high. After all, if people can’t afford to buy, they’ll rent. In such a way, Rightmove should see higher interest in lettings versus sales. Ultimately, traffic still comes to the website.
My second thought is that property is a cyclical sector. We’re seeing the slowdown phase at the moment. Even though it might not feel great to buy when the share price is falling, what’s my alternative? Buying during a boom when the share price is already flying higher? I’d much rather buy now to pre-empt a future move, even if it’s for the long term.
A defensive cheap share
A second company I like is Admiral (LSE:ADM). The insurance provider has endured a tough period, with the share price down by 36% over the past year. In the half-year report, it spoke of “progress against the backdrop of a more turbulent cycle than usual, and high levels of inflation”.
I accept that it’s a tough time right now, with premiums having to rise in response to inflationary pressure. Yet I think the business is in a good position. It’s still growing the customer base, one of the key long-term metrics I look at to see if the business is fundamentally sound.
It also has a broad range of offerings and isn’t restricted to just servicing one area of the market. This will help it going forward. It appears that motor claims are the area most under pressure at the moment. Yet household insurance and Admiral finance divisions should help to cushion the negative impact going forward.
The price-to-earnings ratio at the moment is 9.75. Anything below 10 starts to get me interested as a potentially undervalued company. Further, the share price has now erased all of the “pandemic premium”. This was the surge it saw in 2020 and 2021 as investors rushed to buy defensive stocks. Now that the stock is priced under its 2020 lows, I feel it’s much better value for me to step in and purchase.
I want to buy both stocks shortly when I have more free cash.
