As someone in their 30’s, I don’t think about my retirement age that much. All I know is that it’s a long way away. Yet if there was some way to cut my working career short, I’d take it. Fortunately, there are some ways I can potentially do this. One includes buying cheap shares from the stock market. Here’s what I mean.
Finding what’s actually cheap
I completely understand that calling something cheap is subjective. To a billionaire, a Ferrari is considered cheap. Yet when it comes to stocks, I can try and objectify it a little more.
Cheap stocks are ones that have fallen below the fair value. This might be due to investors being overly bearish, or because people aren’t correctly taking into account the future outlook for the business. Either way, the current price not might accurately reflect the true value. As such, if I buy these stocks now, I could stand to make a profit in the future if it does rally.
A traditional way to identify a cheap stock is the price-to-earnings ratio. This takes into account the share price relative to the latest earnings per share. If the ratio is low, then it could suggest the stock is undervalued.
Another tool is the historical share price performance. Over the past year, if a stock has fallen by a considerable amount, this could indicate it has been oversold. I can filter using percentage return over a 12-month period.
Particular stocks I like
Based on the above, there are several stocks I’m thinking about buying now. This includes Marks & Spencer (P/E of 7.42) and Kingfisher (10.42).
I feel it might take a while for these stocks to rally, as the UK consumer is likely going to be feeling the pinch for the rest of this year. However, I feel there’s good long-term upside available as the economy recovers. Indeed, the Marks & Spencer share price could almost double from current levels before it would reach the high from the past five years.
Aviva (4.87) and Legal & General (9.68) both look undervalued to me. The insurance space is never going to be the most exciting area to invest in. The sector also has inherent liquidity risk, arising if there’s a large number of claims in a short space of time. But when trying to put my money to work, I think it’s an appealing sector.
The good levels of cash flow generated enable dividends to be paid. Aviva currently has a dividend yield of 5.51%, with Legal & General at 7.16%. If the share price rises from here and the dividend stays the same, the yield will fall. Therefore, this provides me with even more of an incentive to buy now while it’s still cheap.
Potential gains
Let’s say I invest £150 each month into each of the four stocks. I’m going to assume an annual return of 10%, which includes dividend income and capital gains. I know that’s not guaranteed and that I could gain less, or even lose money. But after 16 years, I might have a pot worth £285,000. From here, I could trim off the annual dividend payments and share price gains and use it as income so that I didn’t have to work. In year 17, this would amount to £30.2k, without touching the rest of my portfolio.
