In the depths of the stock market crash, the FTSE 100 index shed a staggering 32% of its value. Since then, global stocks have staged an impressive comeback, but many still trade below their average historic valuations. In my view, there’s an array of cheap UK shares on offer at the moment that look oversold thanks to the market crash. I think long-term investors could realise some serious returns by investing in a selection of them today.
In this context, stocks that appear oversold are companies whose share prices have decrease substantially. So much so that the stock may have become undervalued as a result of a major sell-off. Remember though, investors seeking undervalued stocks don’t simply buy shares because the price has fallen, but because, in their view, it has fallen too much.
It can be difficult to spot oversold and undervalued stocks. But there are several things you can look out for. The price-to-earnings ratio is perhaps the most useful indicator. To put it simply, the P/E ratio illustrates what investors are willing to pay for a particular share based on its past or future earnings.
A low P/E ratio, especially relative to other companies in a given industry, is often a sign that a stock is undervalued, as the current share price is low relative to earnings. However, investors shouldn’t completely dismiss companies with high P/E ratios as there may be good reason for this. For example, faster growing companies usually have higher P/E ratios as investors expect growth to continue in the future. With that in mind, here are a few cheap FTSE 100 shares that I think meet the criteria.
Cheap UK shares
British property developer Bellway has seen its share price plunge 34% since its mid-February high. Understandably, investors cashed out in response to the outbreak of Covid-19, causing the share price to tumble. However, throughout the lockdown, Bellway’s order book remained “substantial”, with prices reported to be similar to pre-pandemic levels. As such, with a P/E ratio of 6.2, Bellway shares look oversold and thus, undervalued to me.
Cigarette and vaping giant British American Tobacco is one of only a handful of companies that has, so far, managed to stand by its dividend policy and earnings target. Impressively, the group still expects growth in 2020 after having a strong start to the year. Volumes were up 0.4% and market share rose by 0.2%, a small but significant figure. Despite this, the company’s P/E ratio is only 9.8. Combine this with a bulky 6.5% yield and the stock looks ridiculously undervalued in my eyes.
Finally, UK-based cinema chain Cineworld also saw its share price take a beating in the sell-off. In the depths of the crash, the shares fell by 88%. Since then however, the stock has recovered slightly and now sits down by 53%. Having received £89.73m of additional liquidity, the group reckons it has sufficient headroom to survive a complete closure until the end of the year. Nonetheless, the firm expects to be screening films by July. A P/E ratio of 5 backs up the idea that the company may be undervalued and as such, could prove a worthy long-term investment.
All things considered, if you have spare cash to invest, targeting undervalued UK shares could prove a wise strategy. After all, stocks that are truly undervalued offer the prospect of attractive returns through significant share price apperception.