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.

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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.


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.

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