Everyone loves a bargain. As an investor, I am always hunting for cheap shares in great companies I can add to my portfolio.
Here are a couple of shares I own that I expect to hold for the long term. They currently trade on what I think are very attractive valuations. If I had spare money to invest in my portfolio, I would happily buy more of both today.
At the moment, retailer JD Sports (LSE: JD) has a market capitalisation of £8.4bn. But the company said this month that it expects its annual headline profit before tax and exceptional items to top £1bn. On that basis, the pre-exceptional headline price-to-earnings (P/E) ratio of less than 9 looks cheap to me.
It apparently looks cheap to other people too. The company’s chairman spent almost a quarter of a million of pounds buying JD Sports shares this month at around £1.51 each. They have already moved up in price since then, but these cheap shares remain 12% below their price a year ago despite strong business performance.
Looking for value
The reason I see JD Sports shares as cheap is not just because of their price. It also takes into account what I see as the future commercial prospects for the retailer.
Sales are expected to reach a record high in the firm’s current financial year. Profitability is strong. I do see risks, such as a recession leading customers to spend less, hurting sales. But JD’s broad geographic reach, differentiated brand and multichannel strategy could help it do well over the long term, in my view.
Tobacco can be a very rewarding business. Cigarettes are cheap to make but can command a premium price. There is clearly a risk for investors, as sales decline over time. But revenues remain large and premium brands can give their owners pricing power.
That explains my investment in FTSE 100 stalwart British American Tobacco. But I have also been looking for cheap shares across the pond. I own a stake in US Marlboro-maker Altria (NYSE: MO). As a believer in long-term investing, I would be happy to hold it my portfolio for years to come.
8%+ dividend yield
Altria shares yield a juicy 8.4%, meaning the company’s quarterly dividend regularly provides a welcome boost to my passive income streams. This year’s dividend grew 4.5% compared to the prior year. Strong cash flows could help the payouts keep rising, although falling cigarette sales mean the dividend could be cut, or scrapped altogether, in future.
I think there is a lot of life left in the firm’s profit streams though. I reckon a P/E ratio of around 10 makes these cheap shares. That is why I would be happy to grow the number of Altria shares I own while they trade at their current level.
C Ruane has positions in Altria Group, British American Tobacco P.l.c., and JD Sports Fashion. The Motley Fool UK has recommended British American Tobacco P.l.c. 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 2023