I first started buying shares in 1986-87, while in my first year at university. Almost 37 years later, I’d call myself a veteran value/dividend/income investor. Nowadays, I’m always looking out for cheap stocks to buy.
Value investing can be hard
Finding undervalued stocks to scrutinise further can be more of an art than a science. That’s partly because value investing seems to have fallen out of favour since the global financial crisis of 2007-09.
Over the past 17 years, buying go-go growth shares (especially mega-cap US tech stocks) was a great way to beat the wider stock market. Indeed, apart from a big win for value stocks in 2022, growth investing has thrashed value since 2009.
In short, being a value investor can be tough at times. Yet I soldier on, driven by the belief that buying good assets at low or fair prices tends to deliver superior returns over time.
How I find undervalued shares
On days when the UK and/or US stock markets are open, here’s how I begin my search for cheap stocks to buy:
1. FTSE fallers
After checking major stock-market indexes, notably the UK’s FTSE 100 and US S&P 500, my next step is to look for market meltdowns. Hence, I search for “FTSE fallers” to find the 20 biggest fallers in, say, the Footsie. (For good measure, I also do the reverse by looking up “FTSE risers”.)
2. 52-week lows
My next step is to visit websites that provide lists of UK (or US) stocks hitting 52-week lows. Often, this is a parade of bombed-out small-cap and micro-cap shares, with few candidates meeting my criteria for further consideration.
Nevertheless, there are sometimes hidden gems and fallen angels lurking within this list of losers and laggards. For example, several quality UK businesses with depressed share prices have hit 52-week lows this month, including large-cap stocks in the consumer goods, energy, and mining sectors.
3. Familiar faces
Another way I look for cheap stocks to review is to keep a watchlist of shares that I’d be keen to own, ideally at lower prices than prevailing levels. Typically, these companies are leaders in their fields, with solid revenues, earnings, and cash flows.
Occasionally, Mr Market messes up by offering me opportunities to buy into great businesses at reasonable prices. At these times, this quote from my hero Warren Buffett spurs me to act: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
What happens next?
Usually, these daily searches lead to me taking no further action. That can be because I don’t find any compelling buys at current prices. At other times, I simply don’t have enough investable cash to spare.
Then again, when I spot outstanding opportunities, I will seize the day. For example, my wife and I bought into a £63bn FTSE 100 firm on 12 January at a price I hadn’t seen since February 2021. Sweet.
By the way, our new stock has jumped 6% in the past two days, which is nice. However, investing is a marathon and not a sprint, so I’m not particularly worried what happens in the first mile. All I aim to do is be richer a decade from now!
