These two cheap shares, one well known and one a bit more under the radar, could have strong share price growth in July and beyond.
A cheap insurance share
The first stock I’m looking at is Aviva (LSE: AV). It’s been going through a pretty aggressive turnaround with many international businesses sold off. Management is now focusing on the leaner (hopefully more profitable) business in the UK, Ireland and Canada.
On many value measures, Aviva looks cheap. Even after a solid share price rise over the last 12 months. The forward P/E is only eight. Although one caveat is that this makes it exactly the same as Legal & General, which is a broadly similar company, so that cheap P/E isn’t unusual.
The price-to-sales ratio is 0.35 and price-to-book is 0.84. With these ratios being well under one, it tells me as an investor that Aviva still appears to be a cheap share.
When I look at the recovery in the business, there’s the potential for strong dividend growth in the future. In 2021 the dividend is expected to grow by 75%. These figures are flattered by the 2019/20 financial year dividend cut. Nonetheless I think it’s a positive sign from the new Aviva.
In July the shares could rise in anticipation of August’s half year results, which should show Aviva’s progress and factor in the recovery from Covid-19. The big opportunity though, in my opinion, is to hold these shares longer term.
I’m considering adding Aviva to my own portfolio, based on the value and a growing dividend.
Could the share price fall?
Of course the share price of Aviva, despite all the good work, could fall. The expected benefits of becoming smaller may not materialise long term. The UK economy could struggle and being more reliant on it, so in turn could Aviva.
Insurance is also a competitive market where it is hard to get customer loyalty, this could make growth harder to come by as could rules on penalising loyal customers, introduced in the UK recently.
Low P/E + high yield = attractive?
Smiths News (LSE: SNWS) is a cheap share that’s less well known than bigger, consumer-facing company, Aviva. Yet for a value-inclined investor like me, it could have a lot of potential to provide useful returns within a balanced portfolio.
It’s a newspaper and magazine distributor, a business that may be in decline due to consumers switching to digital. However, the same has been the case for cigarettes for decades. Sometimes change is more incremental than the headlines would suggest. Good management can still eke out profits by focusing on costs and potentially new growth opportunities.
When I look for cheap shares, Smiths News often comes up. That’s because the forward P/E is only four. That’s incredibly low. Together with a dividend yield of 5%, this appeals to both my value and income instincts.
However, as with any cheap share, there’s a risk it’s a value trap. So the shares could go even lower, even though they’re already priced very cheaply. Investors may fret about the decline of the newspaper business, which could hold back, or limit, any share price recovery.
Overall though, Smith’s News is a cheap share I’ll be keeping an eye on in July. I may even add it to my portfolio given the combination of low P/E and high dividend yield.
The post 2 cheap shares I’d buy in July appeared first on The Motley Fool UK.
Andy Ross owns shares in Legal & General. 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.
Motley Fool UK 2021