The past five months haven’t been pretty for the FTSE 100, the UK’s main market index. After crashing spectacularly to below 5,000 points on 23 March, the Footsie then staged a strong comeback. By 5 June, the index had soared above 6,484, surging close to 30% in just over 10 weeks. Alas, it closed at 5,729 on Tuesday, down over 750 points (11.7%) since its June peak. Then again, the good news for patient value investors is that our favourite cheap shares just keep getting cheaper.
Cheap shares: BP stands for ‘Bumper Profits’
In 33 years of being a value investor, I’ve seen some incredibly cheap shares dumped into the bargain bin. Sometimes, this happens for good reasons. Other times, brave investors have to grit their teeth and buy cheap stocks that appear to be on the road to ruin.
What more can I say about the struggles of BP (LSE: BP)? As these cheap shares have plunged in 2020, I have repeatedly run the rule over them. The good news for long-suffering BP shareholders is that, following its latest results, there is a ray of hope.
After gruesome losses in its second quarter, BP produced a much-improved performance in the third. The oil giant revealed underlying replacement-cost profit of $86m in Q3. Although this was a whopping 96% below the $2.3bn produced in Q3 2019, it was ahead of a predicted loss of $120m. Encouragingly, net debt dipped by $0.5bn to $40.4bn. The good news for income investors is that BP maintained its quarterly dividend at its new level of 5.25 cents.
BP’s cheap shares closed down on Tuesday, losing 4.26p (2.1%) to hit yet another generational low of 195.74p. With its dividend yield pushed up to 8.2%, I believe it’s time for bold investors like me to bite the bullet and buy big.
HSBC is bouncing back
Global mega-bank HSBC Holdings (LSE: HSBA) was the FTSE 100’s other fallen angel to report improved results on Tuesday. Its cheap shares popped slightly on this news, rising 10.75p (3.4%) to close at 330.1p. Yet they have almost halved in the past 12 months, falling 46.5% to drag down HSBC’s market value to just £65.1bn. Driven by improved results at its Asian operation, the bank’s quarterly profit came in at $1.4bn. This was more than $0.5bn ahead of the forecast $882m.
Despite Covid-19, the bank has a fortress balance sheet and billions in excess regulatory capital. But cancelling its dividend earlier this year (for the first time in 74 years) contributed to steep falls in HSBC shares. This pushed them deep into my ‘cheap shares’ bin. The good news is that HSBC has confirmed that it will restart dividends in 2020 as soon as possible.
In summary, the return of HSBC’s enormous yearly cash payout would be welcome worldwide from Harrogate to Hong Kong. That’s why, as with BP, I’d buy these cheap shares today, ideally inside an ISA, to enjoy a future stream of tax-free dividends and capital gains!
