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Top stocks for an ISA! I’d buy these 2 cheap UK shares now for a stock market recovery

Peter Stephens
·3-min read
Business development to success and FTSE 100 250 350 growth concept.
Business development to success and FTSE 100 250 350 growth concept.

Despite the stock market’s recent recovery, there are a number of cheap UK shares that could prove to be top stocks for an ISA over the long run.

In fact, the FTSE 100 continues to trade around 20% lower than it did at the start of the year. As such, a number of high-quality companies still offer wide margins of safety.

With that in mind, here are two large-cap shares I like that appear to offer scope for significant capital appreciation over the coming years.

A buying opportunity among cheap UK shares?

Taylor Wimpey’s (LSE: TW) share price fall of 25% since the start of the year means that the housebuilder now appears to offer good value for money relative to other cheap UK shares.

For example, it trades on a forward price-to-earnings (P/E) ratio of just 11.6. This suggests that investors may have priced-in many of the risks faced by the housing sector. They include a challenging economic outlook and question marks surrounding the affordability of homes.

However, the company’s most recent investor update highlighted that demand has remained resilient over the past few months relative to other UK shares in the same sector. It has also seen relatively modest increases in cancellation rates for existing sales. Moreover, the company has been able to use a weaker economic period to its advantage through land purchases. They may provide the business with scope to grow profitability over the coming years.

Certainly, Taylor Wimpey faces a challenging outlook due to rising unemployment and political risks. However, its low valuation and solid market position may mean that it offers greater scope to deliver a recovery than other cheap UK shares over the long run.

An opportunity for growth in the stock market recovery

J Sainsbury (LSE: SBRY) also appears to offer improving prospects relative to other cheap UK shares. The company’s most recent update showed that it will seek to make changes to its operating structure.

For example, it will close a large number of standalone Argos stores and have concessions in a wider range of supermarkets. It also intends to ramp-up its online delivery capabilities. This could provide it with a stronger position in what looks set to be a key growth area for UK retailers over the long term.

The Sainsbury’s share price has fallen by around 14% since the start of the year. Its P/E ratio of 10.5 suggests that it could be undervalued as a result of the potential for its refreshed strategy to have a positive impact on its financial performance.

Therefore, it could offer capital growth potential over the long run within a diverse portfolio of cheap UK shares. The stock market recovery may not be a smooth process. But history suggests that the FTSE 100 is likely to produce positive returns over the long run.

The post Top stocks for an ISA! I’d buy these 2 cheap UK shares now for a stock market recovery appeared first on The Motley Fool UK.

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Peter Stephens owns shares of Taylor Wimpey. 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 2020