Another month, another set of investment decisions. As the stock markets continue to rise, I intend to buy more UK shares in May. I know it sounds strange that there are still dirt-cheap shares around, but I believe there are. Especially as a long-term investor, who believes in shares that are down and out just because of where we are in the business cycle, and not because they are inherently underperforming ones.
What is a dirt-cheap stock?
But before I get into which UK shares look most attractive to me, I would like to clarify what ‘dirt-cheap’ indicates. It can be viewed in a number of ways. One is absolute price. Penny stocks, for instance, have appeal to investors because of the sheer volume that can be purchased for little money. They are accessible even to investors with limited funds.
The second is relative price. One way to consider relative price is in relation to where the stock was in the past. There are some UK shares, including even FTSE 100 ones, that are still trading below pre-pandemic levels. And this is despite the fact that their financials look rather robust.
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Another, and more technical, way to consider relative price is by looking at the price-to-earnings (P/E) ratio. The P/E provides a good comparison across stocks, since it correlates stocks with their earnings. I find it particularly instructive to compare a stock’s P/E with that of the index it belongs to.
For instance, if a FTSE 100 stock has a P/E below that of the index average, it is likely undervalued and vice versa. The same is applicable even for a particular industry. Some industries typically have higher or lower P/Es than the index average, so that comparison can prove helpful too.
Lloyds Bank is one of the UK shares to buy
Based on P/E, I think Lloyds Bank stock is pretty close to dirt-cheap right now. It has an earnings ratio of six times, which is significantly lower than the FTSE 100 ratio of 15 times and even below that of some of its industry peers. In fact, even in absolute terms it is the cheapest index constituent with a price of around 45p as I write.
It is more vulnerable to a housing market crash as the UK’s biggest mortgage lender, but as an investor in the stock, I think it is priced quite low, all things considered.
Loading up on BP
I also believe that the oil biggie BP is undervalued based on the fact that it is still trading at below pre-pandemic levels. I have to admit I am having a hard time wrapping my mind around this considering what a long way oil prices have come ever since.
The stock has risen ever since, to be sure. And its financials have improved significantly since the worst of the pandemic. Its profits were even bigger in 2021 than in 2019, but its price has not risen to keep up, in my view.
Like Lloyds Bank, I hold BP in my portfolio too. There is a risk that oil prices could calm down during the rest of 2022 and beyond, impacting its profits. But I think there is still a case for me to buy more of it, especially as it pivots towards renewable energy.
