5 cheap shares I’d buy for the stock market recovery

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Last week’s bounce across markets was encouraging. Could 2023 actually deliver the mother of all rallies? I’ll save you some time. No one knows for sure.

However, this hasn’t stopped me from hunting for cheap shares that could eventually deliver stonking returns. Here are five I’d feel comfortable buying today. In fact, I’ve already snapped up one of them in February.

Out-of-favour sectors

Housebuilder Persimmon has felt the full force of rising mortgage rates and the cost-of-living crisis. Its share price is down 39% in 12 months.

But this company is in far better shape than it once was. It’s got stacks of cash that could be used for buyiing high-quality land while prices are depressed. And I don’t see the dividend being withdrawn… perhaps just reduced to a more prudent level.

A price-to-earnings (P/E) ratio of 11 could prove to be great value if/when inflation falls and interest rates slow. Regardless, the shortage of property in the UK remains a big tailwind over the long term. I now hold.

Sports/fashion retail giant JD Sports was my top pick for 2023, back at the end of December. Since then, it’s returned 40%. That compares extremely well to the FTSE 100 index (4.2%).

I think more gains lie ahead. The shares only trade at just 14 times forecast earnings. That seems reasonable, given CEO Regis Schultz plans to double revenue, profit and, consequently, market share by 2028.

Of course, execution is everything. And retailing is a tough old game. So it’s important to reduce risk by spreading my money around.

Contrarian bet

I’ve cheated a bit with my third pick. As it sounds, Polar Capital Technology Trust is a fund full of stocks from the technology space. Like retailing and property, this sector was hated in 2022, due to galloping interest rate rises.

But I think this aversion is temporary. The idea that mega-caps Apple and Microsoft are somehow ex-growth is a step too far. This is especially the case with the latter’s recent investment in OpenAI.

Investors also need to consider the track record. The Polar Capital trust is still up by over 88% in five years.

Buy before the boom

My two remaining picks are finance-related.

Unsurprisingly, last year wasn’t great for fund managers. Liontrust Asset Management is a great example of a company that suffered.

However, I think now could be a good time to buy. Once established, the recovery will bring forth a wave of money from retail investors wanting to get back into the game, via actively managed funds.

In the meantime, I’d be getting paid to wait. Liontrust shares yield a forecast 5.7%.

A final cheap share I’d buy is IG Group. As a market leader, the online trading platform provider is well-positioned to benefit from a rush by traders to buy into the next bull market. Again, there’s a solid dividend stream (5.8% yield) that’s covered by expected profit.

Throw in a robust balance sheet and plenty of growth potential (especially in the US) and a P/E of less than 9 looks like a bargain, even if IG is often subject to regulatory meddling.

I’d buy this stock (and the other three I don’t own) now if I had the funds available.

The post 5 cheap shares I’d buy for the stock market recovery appeared first on The Motley Fool UK.

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Paul Summers owns shares in Persimmon plc. The Motley Fool UK has recommended Apple, Liontrust Asset Management Plc, and Microsoft. 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 2023