With some blue chip shares performing well lately I’ve been looking hard in the stock market in an attempt to find bargains. Here’s a list of dirt cheap shares I am now holding in my own portfolio.
By ‘dirt cheap’, I mean they trade significantly lower than I expect them to in future. Only time will tell if that expectation is justified.
Why I would consider dirt cheap shares
A lot of seemingly dirt cheap shares are priced low for a reason.
There are still potential bargains to be found, though. Some dirt cheap shares are priced low due to short-term problems. If I expect them to recover over a period of years, I’d still consider buying them. There is always a risk that shares lose value, of course, which is why I diversify across multiple stocks.
Defence contractor doldrums
The doldrums isn’t a good place for a share price to be. It’s a mariners’ term originally. So it’s ironic that naval contractor Babcock (LSE: BAB) finds its share price in the doldrums. It’s down 30% over the past year. The Babcock share price is just a third of the price it was five years ago.
Why have the Babcock shares lost momentum? Risks include a revision of the balance sheet which has cut profit forecasts. There is a risk of further contract writedowns in future, so profits could fall yet further. The City is eyeing the share valuation beadily.
But I am holding these dirt cheap shares and waiting for recovery. The company has a strong order book. It can benefit from long relationships with key customers such as the Ministry of Defence. Facilities such as dockyards are hard for competitors to replicate.
Underlying operating profits for last year, before impact from the accounting review, are expected to be £307m. That’s over a fifth of the current market cap of £1.48bn.
Neglected property portfolio
Car dealership Lookers (LSE: LOOK) is up 170% over the past year. Why do I still think these are dirt cheap shares? Currently, the stock market values the company at £265m.
The company had property with a net book value of £314m last summer. Even allowing for net debt of around £45m at year end, that suggests the market cap is roughly equivalent to the company’s property assets alone.
But Lookers is one of the leading car dealerships across the UK. It sold over 44,000 vehicles in the first quarter of this year. Its expectation for full year pre-tax profit in 2021 is materially ahead of the analyst consensus. I don’t think the share price reflects that right now.
Holding dirt cheap shares for a decade
Both of these dirt cheap shares have had a very challenging couple of years. Babcock’s contract valuation reassessment shook confidence in the company’s accounting practices. Lookers saw its shares suspended for months while forensic accountants undertook a fraud investigation. Both have suffered reputational damage, which could be a risk when it comes to attracting or retaining customers in future.
If I hold for many years, the companies should have time to demonstrate their capability. I hope that will be reflected in their share prices no longer being dirt cheap.
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christopherruane owns shares of Babcock International Group and Lookers. 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.