I’m always on the lookout for cheap shares to buy for my portfolio. But what are ‘cheap’ shares?
I’m not talking about stocks that are simply cheaper than they were a year ago, I’m talking about meaningfully undervalued companies.
But to find undervalued stocks I’ve really got to do my research. So, let’s take a close look at the two stocks I’ve recently bought and intend to hold for 30 years.
Dividend giant in insurance
I’ve recently bought shares in Direct Line Group (LSE:DLG). The insurance firm experienced challenges in the form of claims inflation early last year and management announced a 31.8% decline in first-half pre-tax profit.
But after a recent rally, most of which I was able to benefit from, the stock remains down 19% year-on-year.
In the near term, the company says that through steps taken within its network of garages, as well as increasing prices, it has returned to writing at target margins “based on latest claims assumptions“. Moreover, with rising interest rates, Direct Line should be able to earn more by investing cash premiums.
However, that doesn’t explain why I intend to hold this stock for the long run.
Firstly, I don’t see demand for insurance waning over time. Insurance institutions have existed for centuries and, despite competition from fintechs, I’m expecting it to stay that way.
Valuation wise, the discounted cash flow model suggests that the stock is undervalued by 33%, despite the recent rally.
But I’m also holding it because of the dividend yield. The stock currently has a yield of 10%, but I bought when the yield was 12%.
Dividend coverage is just 1.1, but the firm’s cash generating capacity is impressive so I’m also planning to buy more.
Consumer healthcare
Haleon (LSE:HSN) was born when it demerged from GSK and it went straight into the FTSE 100.
It’s a consumer healthcare giant that serves more than 100 markets worldwide and has an established presence in multiple channels. The firm also has considerable partnerships with retailers and pharmacy chains in the US.
So, why Haleon?
It’s frequently discussed that populations are ageing, especially in advanced economies, and this will generate increasing demand for healthcare services, drugs, treatments, vaccines and more.
To me, it seems logical therefore to invest in a company at the cutting-edge of consumer healthcare. I’m anticipating demand for its products to grow over the coming decades.
Haleon owns brands like Sensodyne, Advil, and Voltaren, all of which are household brands. And this gives it pricing power and the capacity to pass on costs to consumers. In many respects it’s a defensive purchase, but I also see this brand value as being an important part of the firm’s growth.
Since buying Haleon, the share price has jumped 13%, but I’d still buy more. I’m backing this British stock for the long run.
