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Will the stock market recover? Surely one day he will, right? And if it’s soon, today’s very cheap stocks could quickly become history.
So, let’s think about how to choose five cheap ones. FTSE 100 actions now, from different sectors.
Start simple
I’m going to start simply. I’ll look for the stock with the lowest forecast price-to-earnings (P/E) ratio in each sector and pull out five of the results.
In fact, I would check many more things before purchasing. But my search for cheap stocks has to start somewhere.
| Sector | Stock | PHYSICAL EDUCATION | Dividend | 12 months change |
5 years change |
| Banks | Barclays | 5.1 | 4.8% | +0.9% | -7.5% |
| house builders | Participations of the Berkeley group | 11.9 | 3.1% | +25% | +13% |
| Life insurance | Santiago Square | 11.9 | 6.4% | -23% | -28% |
| Pharmaceutical products | GSK | 11.2 | 3.6% | +15% | -1.7% |
| Mining | Rio Tinto | 9.2 | 6.4% | +9.2% | +31% |
Diversification
If I buy all five, I would get fair diversification. But it would also achieve something else.
What you would have is a portfolio with an average P/E of 9.9 and an average dividend yield of 4.9%. And I don’t think that’s bad at all.
In fact, if I took the risk of not digging deeper and, say, spreading a year’s stocks and shares ISA allocation between them, I suspect I could come back in 10 or 20 years and be happy with the result.
But, using this as a starting point, I think I could do better.
Very cheap?
First, this simple selection has yielded three stocks that I rate as the best in their sectors.
Barclays, with such a low valuation, really seems very cheap to me. Banks face quite a bit of risk over the next year. And Barclays is also exposed to US banking, and the stock market there seems a little hot.
But Barclays is on my wish list, without a doubt.
GSK and Rio Tinto? They both seem very good to me. There is cyclical mining risk and concerns about Chinese demand.
And GSK’s valuation is not very cheap, but it is well below something like AstraZenecawith a P/E of 30.
your deepest
The other two? Neither of them would be my first choice in the sector. But seeing them here inspires me to take a closer look at their rivals and I like what I see.
In the insurance sector, which faces risks similar to those of banks, Aviva either Legal and general It would be my choice. They have slightly higher valuations, but offer better dividend yields, at 8% and 8.7%, respectively.
And that leaves home builders, where Taylor Wimpey It would be my pick of the FTSE 100. Valuations in the sector might not look cheap at all. But in a bad year, when earnings are falling, I see good value. However, you may need time to fully recover.
Stock selection
I find the real benefit of evaluating stocks based on a specific measure like this is that it helps me eliminate the hundreds of stocks out there.
It’s not the end of my search for cheap stocks, but I’d say it’s a good start.
