Buying cheap stocks today may not be an appealing idea to many investors. After all, the prospects for the global economy continue to be very uncertain. And some companies may struggle to adapt to changing consumer tastes in a post-coronavirus world.
However, low valuations within some sectors mean that now could be the right time to buy a diverse range of shares. They could outperform other mainstream assets and help you to generate impressive returns.
Cheap stocks that account for future risks
Some cheap stocks are priced at low levels for good reason. But others appear to be suffering from weak investor sentiment towards their wider industry and stock market. For example, some companies have solid balance sheets, strong cash flow and strategies that could produce improving financial performances in the coming years. Yet they have valuations that, in some cases, were last seen during the global financial crisis.
Furthermore, their valuations suggest investors have factored-in many of the risks faced at present. For example, one risk is the ongoing threat of containment measures caused by coronavirus. Then there is the risk of political uncertainty caused by Brexit. Both appear to be accounted for in the low valuations of many stocks. This could mean that right now is a buying opportunity. Why? These stocks seem to offer wide margins of safety that could lead to impressive capital returns in the long run.
A lack of other opportunities
Buying cheap stocks now may also be a good move due to the lack of other opportunities for investors. Low interest rates mean that bonds and cash are unlikely to produce positive after-inflation returns over the medium term. Similarly, high house prices mean investing in property may be unable to provide the level of returns many investors want.
Therefore, buying a diverse range of stocks today could be a means of generating relatively high returns over the long run. The past performance of the stock market shows it has always recorded new record highs after its bear markets and downturns. Buying shares while they are undervalued may enable you to benefit from its likely recovery following the market crash.
The next market crash
Of course, nobody knows when the next market crash will happen. It could be imminent, or may be many years away. After all, many of the key risks facing investors have been seen for a number of months. This means cheap stocks today may have reached their bottom, making them an attractive investment opportunity at the present time.
Certainly, the stock market will not make uninterrupted gains. However, many stocks currently appear to offer wide margins of safety. Now could be the right time to buy a range of them and hold them for the long run.
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.