I’m hunting for stock market bargains. But since the Covid-crash during the spring of 2020, many UK shares have put in an enduring rally.
However, there are still many stocks I’d buy now. In my eyes, there are stock market bargains around that value underlying businesses and their prospects modestly.
Spotting a stock market bargain
The age-old question of what constitutes good value remains a hot topic of conversation in the investment world. We could look at stocks that are purely cheap on the numbers, such as those with low earnings multiples, and low prices compared to asset values.
But purely cheap stocks are often low-priced for a reason. And often, the reason boils down to being a low-quality underlying business. Indeed, buying stocks can be similar to buying goods. Low-quality merchandise can often carry a cheap price tag. And better-quality items usually sell for more.
However, in my opinion, the cheaper goods rarely prove to be the best value. Sometimes, cheap goods don’t last long or they prove to be unfit for purpose. And better-quality items can go on to serve us well for years. So, I reckon it’s sometimes wise to pay a bit more to get better value. And that works for everything, from sausages to stocks.
Yet quality and valuation aren’t the only factors I’d consider when aiming to identify stock market bargains. I could look at pricing indicators and numbers that show quality and convince myself I’d found a good deal. But stocks can go nowhere for years if the forward-looking growth prospects for the business are lacklustre. So, for me, the three pillars supporting decent overall value with stocks are valuation, quality and growth.
Valuation versus value
To me, valuation and value are different things. The valuation is the price the market sets on a company as measured by things such as the price-to-earnings ratio and the price-to-book value. But value includes all the things I’ve mentioned. Namely, valuation, quality and growth prospects. As super-investor Warren Buffett sometimes says: “Price is what you pay. Value is what you get.”
And three stocks I reckon display good value right now are copper miner Atalaya Mining, consumer finance specialist International Personal Finance and door & window component supplier Tyman.
Of course, there’s no guarantee these businesses will go on to meet their growth expectations. All stocks carry risks for investors. And just because I reckon I’m seeing attractive valuations, quality indicators and growth potential in these stocks, it doesn’t mean they’ll definitely deliver for me.
But I’m inclined to embrace the risks because I see these three as stock market bargains when set against their growth potential. So I’d be keen to invest £3,000, spread evenly between these stocks as part of my diversified long-term portfolio.
