5 dirt-cheap shares I’ve bought before the market recovers!

Dr James Fox is always on the lookout for cheap shares to add to his portfolio. Here, he highlights five recent purchases.

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I’m delighted that there are plenty of cheap shares to pick from following the 2022 correction. In some respects, this could be a once-in-a-decade opportunity to buy stocks at substantial discounts.

But what are cheap shares? It’s not just stocks that are trading with lower share prices than a year ago. It’s about looking at fundamentals, metrics and models, and comparing stocks against their peers.

So here are five cheap stocks I’ve recently bought.

Blue-chip stocks

Buying top-quality stocks at knockdown prices is like hitting the jackpot. And with the market pushing downwards over the past year, there’s a host of quality companies trading at discounts.

I’ve made several investments into banks and other financial institutions in recent weeks. And Lloyds is perhaps my top choice.

Interest rate sensitivity is providing Lloyds with a huge tailwind. The bank’s net interest margin was forecast to reach 2.9% by the end of 2022, and it could grow further in 2023.

Lloyds also earns more from cash deposits left with the Bank of England (BoE). For every 25 point basis hike, Lloyds will earn around £200m in income from reserves held with the BoE.

I’ve also been buying more Barclays stock. The bank is perhaps the most unloved UK financial institution. But that has contributed to its discounted position versus its peers. The stock trades with a price-to-earnings (P/E) multiple of 4.6, considerably below its peers — HSBC trades with a P/E of 11.

There are some near-term challenges for UK-focused banks like Barclays and Lloyds in the shape of a recession. But I’m buying for the long run. Discounted cash flow models infer that they’re undervalued by 60% and 45% respectively.

Renewables into dividends

I’ve recently bought shares in Greencoat UK Wind. This is a trust that invests in onshore and offshore wind farms in the British isles. The stock trades at a 3% discount versus its net asset value after a recent dip in the share price.

Greencoat aims to provide investors with an annual dividend that increases in line with retail price index inflation. The current yield is an attractive 4.8% and it trades with a P/E of seven.

I saw the recent downturn as an opportunity to invest in a highly promising part of the market. Energy prices are rising, and this has propelled the firm forward over the past year. Wind can be temperamental, but not in recent weeks.

China reopening

For me, some of the most promising electric vehicle firms are from China. But over the past year, their development has been hindered by Covid measures that saw factories shut and restrictions that caused supply chain bottlenecks.

Two stocks I’ve recently invested in are NIO and Li Auto. Both stocks trade at discounts versus their American peers. For example, NIO trades with a price-to-sales (P/S) ratio of 3.8, while Lucid trades with a P/S ratio of 38.

These Chinese firms are also producing highly competitive vehicles that, in many respects, appear superior to what is already on the market. I bought in the dip and hope to the see firms get back on track in 2023.

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.

James Fox has positions in Barclays Plc, Li Auto, Lloyds Banking Group Plc, Nio and Greencoat UK Wind. The Motley Fool UK has recommended Barclays Plc, Greencoat Uk Wind 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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