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2 overlooked cheap shares I’m tipping to eventually soar

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Image source: Getty Images

I’m honest enough to admit I often look past smaller firms without much fanfare and presence when I’m hunting for quality cheap shares.

There are plenty of bargains out there that fly under-the-radar, if you ask me.

Two picks that caught my eye recently are Costain Group (LSE: COST) and Coats Group (LSE: COA).

Here’s why I reckon both stocks could be shrewd investments for me right now. I’d love to buy some shares if I had the spare investable cash.

What they do

Costain is a sustainable infrastructure solutions provider with roots stretching back to 1865. In simple terms, it builds pivotal structures, such as public services buildings, roads, railways, and more.

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The shares have been on a great run recently. They’re up 31% over a 12-month period from 60p at this time last year, to current levels of 79p.

Coats Group is the world’s largest thread and structural components manufacturer for apparel, footwear, and other materials.

Unlike Costain, Coats shares have meandered up and down over a 12-month period. Ultimately, they’re up 2% from 77p at this time last year, to current levels of 79p.

Costain’s investment case

Costain’s track record and history in helping infrastructure move forward is unrivalled, in my view. This could play a big part in future growth too, as the UK is looking to spend big in this area as ageing facilities need to be revamped. Furthermore, a rising population also needs to be catered for.

Full-year results posted last month showed a large order book, as well as increased profit levels, margins, and the reintroduction of a dividend. These are just some key positives I noted.

The shares look cheap to me on a price-to-earnings ratio of eight. A dividend yield of 1.6% sweetens the pot too. However, I do understand that dividends are never guaranteed.

From a bearish view, the cyclical headwinds of the economy have hurt Costain in the past, and could do so in the future. For context, economic issues can dampen infrastructure spending. The pandemic is a prime example of this happening, and current economic woes won’t be helping the firm either.

Coats’ investment case

I reckon Coats is a great stock to buy for eventual recovery, as well as growth and returns. The shares may not trade at current levels for long. A P/E ratio of 13 looks attractive to me for a business that provides the thread for a quarter of the whole world’s clothing! Furthermore, a yield of 2.8% helps my investment case.

I’m aware that the fashion industry has been hit hard by volatility across the globe. Issues including tighter margins, and stock control as consumer spending has weakened have hurt the firm. I reckon it’s also the reason the shares have been held back too. If this continues, the shares may continue to struggle, and returns could be impacted.

A good track record of cash generation, and what looks like a healthy balance sheet, could help stave off issues during the current malaise. When the retail sector recovers, I’d expect Coats shares to climb upwards.

The post 2 overlooked cheap shares I’m tipping to eventually soar appeared first on The Motley Fool UK.

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Sumayya Mansoor has no position in any of the shares mentioned. The Motley Fool UK has recommended Coats Group Plc. 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 2024