2 dirt cheap shares for a diverse investment portfolio!

Dr James Fox details two cheap shares he thinks investors should be buying due to their relative valuations and prospects.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Young Caucasian woman with pink her studying from her laptop screen

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

We all want to pick up cheap shares. Well, I mean meaningfully undervalued stocks rather than companies than are cheap for a reason. Today, I’m looking at two stocks from very different sectors. Both trade at attractive relative valuations.

Let’s take a closer look!

Legal & General (LSE:LGEN) is a blue-chip FTSE 100 stock, and it trades with a price-to-earnings ratio of just 7.2. That’s almost half the index average.

The company clearly isn’t cheap for a reason, but in recent years investors will have been disappointed by share price growth. In fact, the stock is down 10% over one year, and down 20% over three years.

The multinational financial services and asset management company has a brand that is recognised by millions. Coupled with robust demand and a history of being a well-managed business, it’s very profitable.

Currently, the yield sits at 7.25%. Last year, the dividend coverage ratio — a metric that indicates how many times a company can pay its dividend from its net income — was 1.85. That’s pretty safe, and there’s a track record for dividend growth.

The cheap valuation may reflect concerns about the company’s exposure to credit risks and the UK economy that could cause it to underperform. However, since these concerns were first raised, we’ve observed an improving outlook for the UK economy.

In short, it’s a great business. It is highly exposed to the positive trends in bulk purchase annuity, while pension risk transfer (PRT) is one area of the market that is seeing explosive growth. Firms are increasingly turning to Legal & General to manage their defined benefit (DB) pension plans.

With a positive outlook for growth, an attractive valuation, and a handsome yield, it’s a strong buy for me. I’ve recently topped up my holdings in the UK firm.

NIO

And now it’s time for something entirely different. NIO (NYSE:NIO) is a Chinese electric vehicle (EV) manufacturer that has all the hallmarks of an incredibly successful business.

The Shanghai-based company a highly promising range of vehicles, and they rival Tesla for range. It’s also increasingly looking like the market leader for driver tech.

NIO also uses its own unique battery-swapping technology, which allows drivers to change their empty batteries for full ones in a matter of minutes. I feel this could accelerate the company’s growth into the lucrative European market — the second largest EV market globally.

The company is yet to turn a profit — very few EV firms are there yet. But when we look at the EV-to-Sales ratio, we can see that NIO’s valuation is attractive on a relative basis. NIO trades with an EV-to-Sales ratio of 1.9, versus Tesla at 7.6 and Lucid at 43.

NIO has been on a Tesla-esque growth curve, it has access to a considerable indigenous market, and it’s battery-swapping technology should propel its movement into new geographies. Remember, battery swapping will also likely be a considerable revenue generating activity in the future.

I’m already a NIO shareholder, but would buy more at the current price if I had some spare cash.

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 Legal & General Group Plc, and Nio. The Motley Fool UK has no position in any of the shares mentioned. 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.

More on Investing Articles

Investing Articles

Should I buy more Rolls-Royce shares near 500p?

This investor is wondering whether to buy more Rolls-Royce shares this summer or to just stick with those he already…

Read more »

Investing Articles

After its big fall, is the National Grid share price dirt cheap now?

The National Grid share price fell sharply in reponse to new rights issue plans. But is it an even better…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Starting in June, I’d invest £1,000 a month to aim for a £102,000 second income in retirement

This author highlights a less well-known FTSE 100 stock that could help his portfolio generate a very big second income…

Read more »

Investing Articles

Down 47% in 5 years, is the IAG share price due a bounce?

Many companies in the travel sector have seen fierce rallies since 2020. But with the IAG share price still down…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

Despite its drop, I reckon this is one of the best FTSE 100 stocks to buy and hold!

The FTSE 100 has been climbing in 2024 but this favourite of our writer's has been falling. Despite this, she’s…

Read more »

Investing Articles

AI stocks vs EV shares; which is the best sector for me to invest in?

Jon Smith considers the recent rally in AI stocks and weighs up whether to allocate more money there versus EV…

Read more »

A graph made of neon tubes in a room
Investing Articles

Do Greggs shares have even more growth ahead?

Greggs shares have seen some solid growth in the last few months, as the economy shows positive signs. But is…

Read more »

Investing For Beginners

How I’d aim to grow my Stocks & Shares ISA from £20k to £1m

Jon Smith explains how diversification and focusing on sectors for the future can help grow his Stocks and Shares ISA.

Read more »