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3 cheap shares I think could be big winners in 2021

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With a second wave of coronavirus gathering pace across the UK and much of Europe, where should you invest? As a natural contrarian, I’ve been hunting through the market for unloved consumer stocks. I reckon I’ve found three cheap shares that could be bargain buys.

I’m certain this is too cheap

One of my long-running turnaround picks is ITV (LSE: ITV). The television group is still struggling with low advertising spend and difficult filming conditions, but ITV’s share price is now up by more than 40% from the low of 50p seen earlier this year.

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I think this progress is supported by fundamentals. Although revenue fell by 17% to £1,218m during the first half of the year, the group remained profitable.

Thanks to careful cash management and cost control, net debt fell by around 35% to £783m during the 12 months to 30 June, leaving leverage at 1.3x EBITDA — that’s pretty comfortable, in my view.

Income from the group’s content library and production business are helping to support profits, despite the ad slump. ITV is also investing in data services — an area which could help improve profitability.

Analysts expect 2020 to be a low point and have pencilling in profit growth of 19% in 2021. That leaves the stock trading on 7.4 times 2021 forecast earnings, with a possible 7% dividend yield. I rate ITV as a buy.

This cheap share could be a WFH winner

Shares in flooring group Headlam Group (LSE: HEAD) are still trading close to the lows seen when market crashed in March. But I think this company — which distributes flooring to trade and retail suppliers across the UK and parts of Europe — is being unfairly penalised.

The way I see it, there’s no reason why Headlam’s sales won’t return to levels seen in recent years. Even if 2019 was a cyclical peak, a return to the level of sales seen from 2014-16 would leave Headlam shares looking cheap, in my view.

Although a housing slowdown could hit demand, the trend towards working from home might also stimulate sales. Headlam’s finances look very sound to me, so I don’t expect the company to suffer problems while it waits for trading to improve.

Analysts’ forecasts price the shares on 12 times earnings for 2021, with a dividend yield of 3.6%. I reckon this could be a cheap entry point to a good quality business.

Risky but worth it?

My final cheap share may be a little riskier than ITV and Headlam. Hollywood Bowl Group (LSE: BOWL) is the UK’s largest operator of ten-pin bowling alleys. All the firm’s sites have reopened but, for obvious reasons, are running at reduced capacity.

As you’d expect, Hollywood Bowl’s share price has cratered this year, falling more than 50% since 2 January. However, the company’s latest trading update was more encouraging than I expected. Revenue since reopening has been running at 68% of last year’s levels, which seems impressive to me when capacity is restricted.

More importantly, the business is said to have been “cash positive” in August and September. Management expects “a marginal profit” for the full year.

Another period of closure could cause problems. But if trading returns to normal by the middle of next year, I reckon Hollywood Bowl could be cheap at current levels. I’d rate the shares as a speculative buy.

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Roland Head owns shares of ITV. The Motley Fool UK has recommended Hollywood Bowl and ITV. 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.