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Stock market crash: 2 cheap UK shares I’d buy in an ISA for a recovery

Peter Stephens
·3-min read
A stock price graph showing declines, possibly in FTSE 100
A stock price graph showing declines, possibly in FTSE 100

The stock market crash has left many UK shares trading at cheap prices. In some cases, their valuations may underestimate their chances of delivering a recovery in a new bull market that lifts share prices across a wide range of sectors. As such, there may be opportunities to buy high-quality companies at low prices.

With that in mind, here are two FTSE 100 shares that have fallen heavily in this year’s market decline. They may now be undervalued, and could offer recovery prospects over the long run.

A buying opportunity among cheap UK shares?

The stock market crash has caused UK shares such as ABF (LSE: ABF) to deliver disappointing performances. The diversified business that owns Primark has recorded a 20% share price decline since the start of the year as a result of weak financial performance. For example, enforced store closures in many key markets led to a near-halving of its net profit.

However, the company is expected to bounce back in the current financial year. Its bottom line is forecast to rise by over 50%. However, this figure could be reduced depending on whether further lockdowns are required. Since it trades on a forward price-to-earnings (P/E) ratio of 17, it seems to offer fair value for money relative to its historic valuation.

Furthermore, ABF’s diverse business model may reduce its overall risk versus other UK shares. Its operations in areas such as Ingredients and Groceries provide diversification benefits that could be appealing in an uncertain economic environment. Therefore, after its disappointing performance this year, a buying opportunity may exist in a likely long-term stock market recovery.

A FTSE 100 share set to benefit from a stock market recovery?

The prospect of a stock market recovery has lifted the prices of UK shares such as Lloyds (LSE: LLOY) in recent days. Its market valuation has risen by almost 20% in two days, as investor sentiment has improved due to the prospect of a vaccine being available in the coming months.

However, the UK-focused bank’s shares are still down 50% year-to-date. Its financial performance in the first nine months of the year highlights why this has taken place. For example, net income has declined by 17%, as lower interest rates have reduced profitability across the sector.

Despite this, Lloyds has reduced costs by 4% and reported a return to profitability in the third quarter. It also experienced a rise in demand for mortgages, while it was able to further strengthen its financial position.

The stock trades at a 40% discount to its tangible net asset value after its recent share price decline. This could mean it offers good value for money relative to other cheap UK shares. It may offer capital appreciation potential as a stock market recovery takes hold.

The post Stock market crash: 2 cheap UK shares I’d buy in an ISA for a recovery appeared first on The Motley Fool UK.

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Peter Stephens owns shares of Lloyds Banking Group. The Motley Fool UK has recommended Associated British Foods and Lloyds Banking Group. 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 2020