Despite the recent rally for many FTSE 100 shares, a number of cheap UK shares are still available to buy. Many sectors remain unfavoured by investors due to their short-term challenges. Over time, they may deliver improving performances that lead to rising stock prices.
Indeed, the past performance of the stock market shows a strategy of buying cheap shares can be very profitable. Where they have solid financial positions and an investor is able to diversify, a portfolio made up of undervalued shares can provide greater scope for financial freedom.
Buying cheap UK shares
Even though cheap UK shares may not be popular at the present time, they could deliver high returns in the coming years. A key reason for this is that investors may be pricing in poor financial performance that doesn’t last beyond the coming months.
For example, a stock may be struggling at the present time due to disruption caused by coronavirus. While this may put its financial position under pressure on a temporary basis, in the long run it’s likely to experience stronger operating conditions.
Clearly, it’s imperative to invest money in companies that have the financial means to survive a period of weak financial performance. For example, they should have modest debt levels and access to large amounts of liquidity. Otherwise, they may be unable to cope with a prolonged period of lower sales so they can benefit from a likely upturn in the economic outlook.
Investing money in undervalued FTSE 100 shares today
A strategy of buying cheap UK shares has generally been very successful in the past. Value investors have often outperformed the FTSE 100 simply through purchasing high-quality companies when they trade at low prices, and then holding them for the long run.
Since many companies currently have valuations that are significantly below their long-term averages, now may be a sound opportunity to follow a similar strategy.
Of course, growth shares that trade at high prices may remain popular among investors in the short run. This may mean that their share prices outperform value stocks over the coming months. However, investors who have a long-term horizon may benefit more from purchasing companies that offer wide margins of safety.
Ultimately, they may offer greater scope for capital growth as stock market valuations gradually return to their long-term averages.
Building a diverse portfolio
As well as selecting cheap UK shares with solid financial positions, it is important to diversify among a range of stocks. Otherwise, an investor will have too much exposure to one business, sector or region. Given the uncertain economic outlook that may remain in play for part of 2021, having a mix of companies in a portfolio could reduce risk and lead to higher returns.
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.