The stock market rally of the past week or so has seen some large moves. The FTSE 100 index is up around 15% since dropping close to 5,500 points in late October. This is the average performance of all stocks in the index. Some have gained in excess of this, others not so much.
As an investor, I want to try and find the stocks that still look cheap despite the recent surge. That way, I’m reducing my risk of buying stocks that are already fairly valued, or even over-valued in the short term. Here are two such stocks that I’ve been keeping my eye on.
The Taylor Wimpey (LSE: TW) share price has seen gains over the past couple of weeks with the stock market rally. But at 145p, it’s still comfortably below the levels we saw in February of around 230p. Now I completely understand the lack of desire for investors to buy this cheap looking stock for most of the year. As a home builder, it has seen demand fall massively due to the pandemic. H1 saw it incur a pre-tax loss of £39.8m.
But the landscape has changed significantly in just a few months. The property market is booming with pent up demand. Vaccine news out this week should enable the business to more readily complete projects. The government’s push for construction to continue even in this second lockdown is another boost. All of these reasons have seen Taylor Wimpey benefit as part of the wider stock market rally.
I don’t think that the good news has fully been priced in for Taylor Wimpey. In a recent trading update, it expects to resume dividend payments next year, thanks to demand returning. The CEO commented that “we are on track to deliver full year 2020 results towards the upper end of market expectations”. Therefore, I think the share price looks cheap on a relative basis, and could rally further with the stock market.
A cheap oil stock?
For much of this year, the Royal Dutch Shell (LSE:RDSA) share price has been under pressure. The unprecedented fall off in oil prices naturally had a negative impact on the business. This was mostly due to a lack of commercial demand from the aviation sector and consumer demand from other fuel usage. The stock market rally has helped the Shell share price rise, but it’s still cheap in my opinion.
I think buying Shell is a longer term play than Taylor Wimpey. The bounce back in demand as the vaccine gets wider distribution could be slower in the oil sector than property. Q3 earnings were promising, with the dividend payout being raised as a result. So I do believe the company will be able to turn around and be profitable, but latest earnings show that it may take some time.
This is one reason why the share price still looks cheap to me, despite the stock market rally. Should the share price return to 2,000p, this would yield over a 70% gain from buying in at current levels.
As these two stocks show, the stock market rally has shone the light on that fact that we can still pick up companies at a good price.
jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.