Much has been written about the strategy of buying cheap shares and holding them for a long time. In the past, such an approach has been successful for many investors. And there’s a body of literature dedicated to value investing where a stock is deemed attractive if it looks cheap compared to valuation measures.
Why I’m searching for cheap shares to buy now
Benjamin Graham is often called the father of value investing and his books are a good read. For example, I’ve got a copy of The Intelligent Investor on my bookshelf. And that tome is well-known for having been a strong influence on the young Warren Buffett.
But even buying stocks that look cheap when measured against their fundamentals is no guarantee of a successful investment outcome. Cheap shares can get cheaper and then stay there. Even value shares can lose me half my money if I allow them to.
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However, there seems to be an investor rotation going on in the markets. I reckon investors have been shifting their money from expensive growth stocks into cheaper value and recovery shares. And over time, the stock market has a habit of cycling between such trends. I think it’s a good time for value shares to have their time in the sun. So most of my investments focus on that theme right now.
Of course, I could be wrong with my analysis and my value picks could go on to underperform. Nevertheless, I’m sticking to the strategy for the time being and one stock I like the look of is Morses Club. The company is a consumer finance business focused on the home collected credit market.
Attractive on the numbers
With the share price near 66p, the forward-looking earnings multiple is a modest mid-single-digit number and there’s a chunky dividend yield above 6%. But the business has had its wobbles in the past and earnings have a patchy record. Good share performance is far from certain going forward and the somewhat murky outlook is probably why the stock looks cheap.
I’m also keen on H&T, the pawnbroking business. With the shares near 301p, the valuation looks modest and there’s a decent shareholder dividend above 3%. But the valuation has looked modest for this company for as long as I can remember. Another risk is that City analysts expect a further decline in earnings in 2021 on top of the big falls last year because of Covid-19. Nevertheless, as a value proposition, those factors don’t put me off the stock.
I like the blend of agriculture and engineering services offered by Carr. I see the stock as a potential steady investment operating in stable sectors. With the share price near 130p, the low double-digit valuation is undemanding and there’s a dividend yield knocking on the door of 4%. But the stock’s been trending lower for almost seven years. There’s a chance I could buy the stock and hold for a decade and still end up losing money. However, I’d embrace the risks and buy a few of the shares.
I’d aim to hold shares like these three for at least a decade to give the value time to build and feed into the share price.
