I believe one of the best ways to capitalise on the stock market recovery is to buy dirt-cheap shares. These shares, which look cheap today, may benefit from improved investor sentiment as the market outlook improves.
Of course, this isn’t guaranteed. There’s always going to be a level of unpredictability for equity prices, and there’s never any guarantee that a cheap stock will return to levels it reached previously. As such, the strategy may not be suitable for all investors.
However, I’m comfortable with the level of risk involved. That’s why I would buy these dirt cheap shares outlined below to capitalise on the stock market recovery today.
Dirt-cheap shares
When the government announced that it aims to remove all coronavirus restrictions by the summer earlier this week, investors and consumers seemed to breathe a sigh of relief. Holiday bookings jumped, and so did demand for shares that have exposure to the UK economy. That includes shares in companies such as Great Portland Estates (LSE: GPOR) and British Land (LSE: BLND).
This is an incredibly positive development for these businesses. Both the real estate investment trusts (REITs) have suffered a significant decline in rent collection and property values over the past 12 months. This has severely impacted investor sentiment towards both groups.
Unfortunately, the commercial property market is unlikely to recover overnight. It could be some time before property valuations, and rents return to the level seen in 2019. A full recovery may never happen. That suggests these businesses will continue to face uncertainty in the near term. There could also be further pain to come if the pandemic leads to a permanent shift in working arrangements. Great Portland and British Land both have billions of pounds invested in UK offices.
Stock market recovery
However, looking past these risks, I see some great opportunities for these dirt-cheap shares as we advance. The pandemic has presented an opportunity for well-financed property companies to snap up bargains. What’s more, as retailers have collapsed, it has freed up space for landlords to turn unused space into more flexible offerings. This could be a net positive in the long run.
Then there’s the valuation of these firms to consider. Both Great Portland and British Land are trading at a discount of between 14% and 26% to their last reported net asset values. That suggests that, in the case of Great Portland, an investor could buy the whole company, sell off its assets and generate a double-digit profit.
This is only a rough guide as to how much the company is worth, but I think it demonstrates clearly how undervalued this business is at present. Although published net asset values can move due to valuation changes both up and down. So that’s something I will be keeping an eye on going forward.
Nevertheless, despite the risks these businesses face, I think these two dirt-cheap shares could be an excellent way to play the stock market recovery. That’s why I have acquired the investments for my portfolio.
