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Why I’d buy and hold cheap shares today

Peter Stephens
·3-min read
Chart displaying growth
Chart displaying growth

The stock market crash means there are a relatively large number of cheap shares available to buy today. Certainly, some stocks have recovered following the market’s downturn earlier this year. But weak investor sentiment towards a range of sectors means it’s possible to build a diverse portfolio of undervalued companies.

With many bargain stocks being high-quality businesses, they could deliver impressive returns as the economy recovers. They may also produce high income returns that catalyse your portfolio over the coming years.

High-quality businesses may be undervalued

Not all cheap shares are weak businesses. In many cases, high-quality companies are trading at prices significantly lower than their historic averages, due to the uncertain economic outlook. This has caused investors to demand wide margins of safety. Even where a company has the financial means to return to strong growth over the long run.

A challenging economic environment may impact negatively on the performances of many companies this year. But over the long run, those businesses with solid finances and wide economic moats have the potential to produce strong profit growth.

Buying cheap shares may be a means of accessing such companies while investor sentiment is weak. Over time, investor sentiment has the potential to improve. Meanwhile, their profitability may do likewise. This could have a positive impact on your portfolio’s performance in the long run.

An economic recovery is likely

Cheap shares could be among the stocks that benefit most from an economic recovery. Their low prices may provide significant scope for a turnaround in the coming years.

An economic recovery may seem unlikely at present. But a similar feeling is often experienced during downturns and bear markets. However, the world economy has always returned to positive GDP growth. Even after its most difficult periods. As such, the same outcome is very likely to come into existence as current risks facing the global economic outlook gradually recede.

Furthermore, the scale of monetary policy stimulus being used in major economies could mean asset prices move higher over the long run. This could lift the valuations of cheap shares and produce impressive returns for investors.

Income opportunities provided by cheap shares

Cheap shares may also have high dividend yields. This may not seem to be relevant to some investors, such as those individuals seeking growth rather than income. But a large proportion of the stock market’s historic total returns have been derived from the reinvestment of dividends.

Therefore, buying stocks with high yields could be a means of obtaining a higher total return in the long run. High-yielding shares may also become more popular due to continued low interest rates that push their prices higher in the long run. This could boost your portfolio’s performance and improve your financial situation.

The post Why I’d buy and hold cheap shares today appeared first on The Motley Fool UK.

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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