I like to add cheap UK stocks to my portfolio. If I can avoid value traps – shares which keep on going down in value – then it can be a good way to find shares that are undervalued. Cheap stocks can have a lot of upside if bought at the right time, for a sensible price. As legendary investor Warren Buffett says: “Price is what you pay. Value is what you get”.
A FTSE 100 warehouse group
The FTSE 100-listed warehousing company Segro (LSE: SGRO) is my first cheap UK stock. The shares trade on a price-to-earnings multiple of around eight. This suggests the shares could be undervalued. The shares are cheap because of strong earnings growth relative to the share price, rather than poor performance. That’s why I think there could be a lot of upside.
The increase in e-commerce and the potential for consumers’ behaviour to have permanently changed because of the pandemic mean demand for warehouses for retailers will keep on increasing. This should keep prices up, which is good for Segro and other warehouse companies.
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Segro is a great operator. It has consistently performed well in recent years and kept adding to its rent collection. The risks seem limited to me but include rents potentially not being collected if the economy suffers again. Earnings per share growth may also slow against a very strong 2020, which may hit the share price.
Poised for global recovery
Iron ore pellet producer Ferrexpo (LSE: FXPO) is a company well aligned to the reopening of the global economy. Demand for iron ore will pick up rapidly as the world recovers from the pandemic. Construction and other industries that use steel will push up demand for iron ore, which should in theory push up prices for Ferrexpo.
Despite its share rising, the P/E is only around six, which makes the shares seem very cheap. I think that valuation is attractive, but there are risks.
As with any miner, there is a risk that prices fall, which would hit the company’s profits. The company has in the past had governance issues and its mines are in Ukraine, putting it at risk potentially from any Russian geopolitical actions in that country. There are still skirmishes in the east of the country. I think this explains why the shares are cheap.
Cheap UK stock
The outsourcer Serco (LSE: SRP) might not be everyone’s cup of tea after past controversies over charging taxpayers for tagging criminals who in some cases were no longer alive. Nonetheless, today the company seems to have turned a corner under the excellent leadership of Rupert Soames.
Serco is benefitting from increased defence spending. Acquisitions are also helping fuel growth and if well integrated could help boost the share price, in my opinion. The downside with outsourcers are that margins are often low, and contract discipline lessens in the good times meaning they can be quite cyclical investments.
With a P/E of 13, the shares seem to be quite cheap. On top of that, the dividend yield is very low, indicating that there could be growth in the shareholder payout in future. That could add to the total return the company could provide to my portfolio, if I added it.
Segro, Ferrexpo, and Serco then are cheap UK stocks I’d be interested in adding to my portfolio today.
