UK shares have been on quite a rampage. Even after the markets sold off following the start of a new conflict in the Middle East, the FTSE 100 is up more than 20% over the last 12 months, including dividends. And the best part is, for investors leveraging an ISA, all of these gains have been tax-free!
The story’s been quite different for buy-to-let real estate investors. With continuous tax hikes placed on landlords (that don’t have the protection of an ISA tax wrapper), it’s becoming increasingly harder to turn a profit.
That’s why, for investors looking to build up wealth from scratch at 40, I think investing in cheap UK shares is a far more viable and profitable strategy.
But how much money could an ISA make?
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
A quick profit forecast
By putting aside £500 each month to invest in quality UK stocks, index investors have historically averaged a long-term return close to 8%. And assuming the market maintains this average pace, that means over the course of 25 years, a £500 monthly investment would grow into a £475,500 pension pot.
That’s pretty nice. But rather than relying on a cheap-and-cheerful index fund, investors can craft a custom portfolio that focuses exclusively on terrific companies trading at discounted prices.
There’s no denying that this strategy requires significantly more discipline. But it also opens the door to market-beating returns. And even if that means earning just an extra 2% a year, over 25 years, that compounds into £663,417 – a near-£190,000 increase in long-term wealth.
So now the question becomes, how do you find the best cheap UK shares to buy?
Spotting bargains
One of the most popular methods for finding potential bargains is to filter stocks using the price-to-earnings (P/E) ratio. While it varies between industries, most UK shares typically sit below a P/E ratio of 12-15. And right now, applying this filter to the wider FTSE 350 reveals B&M European Value Retail (LSE:BME) as a potential bargain at a P/E of just 7.7.
So should investors rush to buy?
A discounted discount retailer
Through a combination of strategic mistakes, inventory mismanagement, and a surprise accounting scandal, B&M shares have been thrown into the gutter. The result has been a painful multi-year decline that’s wiped out almost 70% of the firm’s market-cap since the start of 2024.
However, with a new CEO at the helm, could that be about to change?
The company is now executing its ‘Back to B&M Basics‘ turnaround strategy, which is starting to bring shoppers back through its doors. But recapturing lost market share to other discounters isn’t going to be easy, especially with wage inflation driving up operating costs.
The group’s now also flirting with the idea of launching its first-ever online shopping platform, expanding into new digital channels for the first time. But this too comes with significant execution risk.
So what’s the verdict? B&M’s cheap valuation is a reflection of the uncertainty surrounding this business. Right now, I think the best course of action is to maybe wait and see.
If more encouraging results emerge signalling the start of a cyclical reset, then it might be wise for investors to think about doing a little discounted shopping.
