As a old-school value investor, my investing strategy is simple. I aim to identify cheap shares, buy them, and then hold them for the long term.
Also, I am guided by my hero, investment genius Warren Buffett, who once remarked, “Price is what you pay. Value is what you get.”
In short, I buy into solid, established businesses at reasonable prices. Hence, I focus on large-cap FTSE 100 shares. Here are two undervalued shares I can’t believe I don’t already own.
Cheap share #1: Anglo American
One Footsie share that caught my eye recently is Anglo American (LSE: AAL). Mega-miner Anglo is the world’s largest producer of platinum. It also mines copper, diamonds, iron ore, nickel, and metallurgical coal for making steel.
Today, Anglo shares are priced at 2,649.5p, valuing the group at £35.6bn. This is 38.3% below their 52-week high of 19 April 2022.
As a result, this stock is down 34.7% over one year, but has soared by 64.5% over the past five years. To me, this suggests some short-term weakness — and recovery potential.
At the current price, this stock trades on a modest price-to-earnings ratio of 8.9, for an earnings yield of 11.3%. This is well above the wider FTSE 100’s earnings yield of 8.3%.
Furthermore, Anglo shares offer a dividend yield of 6.2%, versus the FTSE 100’s yearly cash yield of around 4%. This cash payout is covered over 1.8 times by earnings, which is a decent cushion against dividend cuts.
As a veteran investor, I know mining earnings can be volatile, driven by commodity boom-bust cycles. Often, this translates into turbulent share prices. Also, Anglo has a track record of cutting its dividend in hard times (most recently in 2015, 2016, and 2020).
Despite this, I aim to buy some of these cheap shares for my family portfolio when I have some spare cash.
Undervalued stock #2: NatWest
My second cheap share is the stock of Big Four bank NatWest Group (LSE: NWG), formerly known as the Royal Bank of Scotland (RBS). The group is a major UK mortgage lender, as well as a leading lender to small and medium-sized businesses.
In October 2008, RBS came close to collapse and was saved by a massive government bailout. Today, NatWest is a far less risky beast, but its shares did suffer during last month’s US/Swiss banking crisis.
At its 52-week high, the NatWest share price peaked at 313.1p on 2 February. Now it trades at 264.1p — down almost a sixth (-15.6%) in two months. NatWest shares have gained 14% over the past year, but are down 6% over five years.
Again, what draws me to this stock is its modest rating and market-beating dividend. On a price-to-earnings ratio of 7.3, NatWest shares generate an earnings yield of 13.7%.
Meanwhile, the dividend yield of 5.2% a year is covered 2.6 times by earnings. While this is a wide margin of safety, I’ve no doubt that NatWest’s 2023 earnings will be lower than in 2022.
Finally, with the UK economy weakening and household budgets under pressure, banks’ bad debts and loan losses may leap in 2023. Even so, I’d happily buy these cheap shares when I get a chance!
