7 cheap shares that can help me easily build a second income

Jon Smith runs over several cheap shares that he likes in order to position himself for a future income stream from share price gains.

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Some focus has shifted recently from generating a passive income to making a second income. Although they are very similar, making a second income can require active management. One of the best ways I can find to make an alternative stream of money is from buying cheap shares in the stock market. Over time, trimming profits from this portfolio can enable me to enjoy the proceeds.

Flying high

One area where I feel there are value buys at the moment is within the aviation space. Stocks like Wizz Air, easyJet, IAG, and others have been unloved ever since the pandemic hit in 2020. Even in the past year as we’ve had restrictions lifted, the stocks haven’t materially moved higher. For example, the Wizz Air share price is down 40% over the past year.

However, things have started to change in the past few months. I recently covered TUI, which noted in a recent update that “Q4 customer numbers were at 93% of the full-year 2019 levels”. Even though TUI operates a full holiday business rather than just the flights, it shows to me that travel operators and airlines should get back to 100% levels in 2023.

On that basis, I think the tide of positive sentiment could change very quickly. In fact, I think we are starting to see it taking shape. Wizz Air shares are up 102% in the past three months, with easyJet stock up 43% as well. Even with these moves, when I look back at 2019 prices, I still feel these stocks are cheap and I’m considering buying now.

More cheap shares I’d consider

Another space where I think there are good options is within finance. Several large banks and institutions have a low price-to-earnings ratio. This essentially means that the current share price is lower than where I’d expect it to be based on the latest earnings per share figure. I use a benchmark that if the ratio is below 10, it’s good value.

With the current P/E ratios in brackets, I’ve noted down Lloyds Banking Group (6.40), abrdn (5.05) and Barclays (4.59). These are all ideas I’d think about buying with free cash.

There’s some lag between rising interest rates and major banks benefiting from higher net interest income. This gives me a positive outlook for the sector for 2023. I expect rates to peak in late spring/early summer at 4% (currently at 3.50%). So the banks should be able to continue to boost revenue for most of this year.

As for investment managers like abrdn, I expect this year to see inflows from clients as more appreciate that there are some bargains to be had in financial markets.

Building an income

In years to come, my aim is to sell some of my holdings to generate cash. For example, let’s say I put £1,000 in stock X. If the value jumps to £1,200, I’ll sell £200 worth and leave the rest in the company. A risk is that my picks are poor and never gain in value.

When I do this over an entire portfolio, I believe I can generate a good amount of cash in the long term.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays Plc and Lloyds Banking Group Plc. 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.

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