The Ultimate Guide to Finding Cheap Stocks to Buy Now UK

Investing in cheap stocks has always been an attractive strategy for both seasoned investors and newcomers. Whether you’re looking for cheap stocks to buy now in the UK or exploring opportunities on the London Stock Exchange, you will find this guide useful.

Read on to find the best cheap shares in the stock market.

What Are Cheap Stocks in the UK?

Cheap stocks are stocks with relatively low share prices or undervalued companies based on valuation metrics like price-to-earnings (P/E) or price-to-book (P/B) ratios. These stocks are often overlooked by institutional investors, which makes them an exciting opportunity for retail investors.

Key Characteristics of Cheap Stocks

1. Low Market Cap: Many cheap stocks come from small-cap companies. These companies often have higher growth potential but also higher risks.
2. Undervalued Stocks: Stocks trading at a discount compared to their peers or intrinsic value. These companies are with strong balance sheets and consistent earnings.
3. Penny Stocks: Stocks trading below £1 in the UK or $5 in the US.

Examples of Cheap UK Stocks

Cheap stocks can be found across various industries. For instance:

• Royal Mail: Royal Mail’s stock isn’t cheap technically – £362.00 per share as of Dec 17, 2024. Despite its strong market presence, its current price remains attractive to value investors due to short-term challenges in the business.
• Retail and Consumer Companies: Stocks in this sector may trade at a discount during periods of higher interest rates or economic uncertainty.

The Concept of Value Investing

Many investors may know value investing because of investing legends like Warren Buffett. Value investing, as the name implies, is to identify undervalued stocks that are trading below their intrinsic value. This investing strategy focuses on companies with strong fundamentals and growth potential.

Why Value Investing Works

1. Focus on the Bigger Picture: Instead of chasing short-term profits, value investors look for stocks that may rise significantly over the long term.
2. Buying at a Discount: By purchasing stocks with low valuations, investors aim to benefit when the stock price corrects itself over time.
3. Dividends and Growth: Many undervalued stocks also provide regular dividend payments, which is an extra income for investors.

How to Find Cheap Stocks in the UK

• Search for Undervalued Companies: Look for stocks trading at a discount compared to their peers.
• Consider Past Performance: Analyze the past five years to see whether the company has shown consistent growth or recovery potential.
• Evaluate Industry Trends: Companies in industries like technology, retail, and infrastructure often see fluctuations that can create undervalued opportunities.

Stock Valuation Metrics: A Useful Tool for Investors

When hunting for cheap UK stocks, it’s important to understand key valuation metrics. Here are the top metrics every investor should know:

1. Price-to-Earnings (P/E) Ratio

This metric compares a company’s share price to its earnings per share. A lower P/E ratio can indicate that a stock is undervalued compared to its industry peers.

2. Price-to-Book (P/B) Ratio

This measures the stock price relative to the company’s net assets (book value). A P/B ratio below 1 often suggests that a stock is trading for less than its intrinsic value.

3. Dividend Yield

For value investors seeking income, the dividend yield shows the return on investment through dividend payments. High dividend yields may indicate a stock is undervalued but require careful evaluation of the company’s financial performance.

4. Debt-to-Equity Ratio

A company with a healthy debt-to-equity ratio is better positioned to weather market volatility. Stocks with excessive debt are riskier and may face challenges during periods of higher interest rates.

5. Market Capitalization

Stocks with smaller market caps tend to be riskier but may offer significant growth potential. Balancing small-cap and large-cap stocks in your portfolio can help mitigate risks.

Investment Strategies for Cheap Stocks in the UK

Investing in cheap UK stocks requires a thoughtful approach. Here are some proven strategies:

1. Long-Term Perspective

Cheap stocks often belong to companies with strong growth prospects that may take time to realize. A long-term time horizon allows investors to ride out market volatility and capitalize on the company’s potential.

2. Diversified Portfolio

Building a portfolio with a mix of small companies, mid-cap stocks, and stable large-cap stocks reduces the impact of poor performance from any single investment. Include stocks across different asset classes and industries to spread out the risk.

3. Dividend Investing

Look for undervalued stocks with consistent dividend payments to provide passive income while waiting for the stock price to rise.

4. Focus on Fundamentals

Thorough research into a company’s balance sheet, management, and past performance is key to making informed decisions. Look for companies that are undervalued due to temporary setbacks but have strong company fundamentals.

Risks of Investing in Cheap Stocks

Investing in cheap stocks may bring you substantial profits as well as risks:

1. High Volatility: Cheap stocks, particularly penny stocks, are highly volatile. That means their prices can fluctuate significantly within short periods.
2. Low Liquidity: It may be hard for investors to buy or sell at desired prices, as these stocks have fewer shares outstanding.
3. Speculative Nature: Some cheap shares are priced low due to poor financial performance or weak future results. Such stocks are risky investments.
4. Market Sentiment: Other investors may avoid these stocks, which leads to lower demand and stagnant prices.

Top Cheap Stocks in the UK Stock Market to Watch

Stock	Share Price	P/E Ratio	Dividend Yield	Market Cap
Computacenter	GBX 2,142.00	14.32	3.3%	2.28B GBP
ME Group International	GBX 208.50	14.89	3.77%	785.66M GBP
GSK	GBX 1,333.50	21.89	4.57%	70.35B USD
NatWest Group	GBX 405.80	7.82	4.31%	40.44B USD
Smith & Nephew	GBX 983.00	35.69	3.01%	11.03B USD
Diageo	GBX 2,536.98	18.61	3.12%	71.82B USD
Unilever	GBX 4,655.00	21.30	3.15%	146.08B USD
WPP	GBX 857.60	46.05	4.59%	11.69B USD

(Source: Yahoo Finance, Morningstar, Google Finance)

FAQ: Cheap Stocks in the UK

1. Are Cheap Stocks Always a Good Investment?

Not always. While some cheap shares offer excellent value, others may remain undervalued due to poor fundamentals. You need to research the company’s potential and assess the risks before investing.

2. What Is the Risk of Investing in Penny Stocks?

Penny stocks are prone to high volatility. They offer high growth potential, but also lead to substantial losses, if the company doesn’t meet its growth targets.

3. Should I Focus on Dividends When Choosing Cheap Stocks?

Dividend-paying stocks can be an excellent option for value investors. They give you steady income and show the company’s commitment to rewarding shareholders, even during market ups and downs.

4. How Can I Mitigate Risks When Investing in Cheap Stocks?

• Diversify your portfolio to spread risk.
• Look for companies with strong fundamentals and manageable debt.
• Be cautious of stocks that are too volatile or speculative.

Final Thoughts

Investing in cheap stocks can bring you substantial returns, but it requires thorough research and a long-term strategy.

Focus on value investing and build a diversified portfolio, and you can find hidden gems in the stock market. Whether you’re a beginner or an experienced investor, stay informed and aligned with your investment objectives. Happy investing!