With almost all shares now back to, or even far past, their pre-pandemic levels, the hunt for value is getting tougher and tougher. It is an almost unbelievable fact that global stock markets have added a staggering $28 trillion in market cap from their pre-pandemic high point.
Just to be crystal clear on this, it means that global markets have fully recovered from their dramatic losses in the early months of the pandemic, and then added another $28 trillion in value on top of that! This is, of course, great news for many investors, but it does have one obvious downside.
It is now much harder than it has ever been to find good companies at reasonable prices. Investors, both professional and retail, are asking themselves where can I find cheap UK stocks to add to my portfolio right now? In this article, we take you through few ways you can ‘hack’ the market to find the bargains other investors might be missing.
Small-cap Always Wins in The End!
The first strategy that can be recommended is to go off the beaten path and away from the big-name stocks that normally dominate the financial news. As said, these stocks have seen astronomical growth over the last year, and are now massively overvalued by many traditional valuation metrics.
Only time will tell how the global experiment with gigantic fiscal stimulus combined with ultra-loose monetary policy will play out for these valuations. One this is for sure: large-cap stocks definitely isn’t the right place to go hunting for value right now!
Instead, why not turn your attention to the less well-explored world of small-cap stocks? This is where the giant companies of the future are currently incubating, and these stocks can be had at much, much cheaper prices. The AIM, or Alternative Investment Market, is a sub-section of the London Stock Exchange specializing in small companies. AIM is rammed full of dynamic growth stocks, some of which have the potential to be huge in the future.
It’s also worth considering that in focusing on these kinds of stocks, you can give yourself what is sometimes called an ‘analytical advantage’. By this, we mean that large-cap stocks have hundreds of analysts focused on them, and thousands of investors around the world following their every move. Small-cap stocks receive much less attention, so any time you put into studying a particular company or sector should mean you are well placed to make good calls about what to buy in this sector.
Check Out: Small-Cap and Big-Cap Stocks (With Examples)
Small-cap stocks are known to outgrow large or mid-cap stocks in the long run, but there is of course a big dose of risk involved. Not every small company will succeed – in fact, most won’t. You can research and try to make educated guesses about who will be the winners, but very, very few people can do this successfully time and time.
Another approach to finding cheap UK shares to buy now would be to look at companies that are yet to fully reopen since the lockdown lifted. If their share price is still below what it was before Covid, then it seems logical that this company still has some way to go and some room for the price to rise further as it continues reopening.
A classic example would be cinemas, which were shut for most of the last year and whose revenue streams are just returning now. It’s also worth considering that many of these companies have been forced to innovate over the last year just to stay alive.
This should mean they are now better, more energetic companies than they were before. For example, Cineworld is the worlds second-largest cinema chain, and during the pandemic it rented its screens out for gaming and business conferences.
Data is Everywhere!
The next point might sound obvious, but we live in a world of abundant information and opinions! From social media to newspapers to online research portals and trading platforms, there is no shortage of financial commentary out there.
Whilst not all of this is going to be useful to everyone, there can be no doubt that being open to new ideas and new information is essential to every investor. This is especially true when we are searching for good quality stocks at reasonable prices.
You never know when the next big idea is going to pop up in your inbox or on your newsfeed! Whilst everyone will have their own preferred sources of financial and business news and opinions, it’s definitely good to consult a range of sources and try to listen to as many different perspectives as possible. Diversification to the ley to a good portfolio, and the same principle should apply to your sources of info and analysis.
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Law of Financial Gravity – What Goes Up…
A final suggestion is to look for stocks that are currently unpopular and try to see if there are reasons to believe they may go back up.
Whilst it is easy to be distracted by the turbo-charged growth tech stocks are showing, no stock can grow exponentially forever! When you want to find cheap stocks, you are much better off looking at what has sunk over the last 12 months, possibly even longer.
When you’ve found these ‘losers’, then the real work starts! How are their fundamentals looking? What is the management’s strategy? Are there any new innovations or markets opening up? Have there been rumours of a merger?
All of these above questions and many more should be asked as you research the stocks before you form an opinion about whether or not the worst is behind them. Don’t forget – just because something is unpopular now doesn’t mean the company is doomed to failure. Far from it! Many companies will go through a period of being out of favour with investors, but if you can see the value behind the public image, maybe you can hunt out a few cheap UK shares to buy right now.
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