Where is the UK economy going – and what does it mean for business? Although there are some challenges at the moment, I remain confident in the long-term outlook. A lot of British businesses have strong commercial models, global reach and consistent profitability. British American Tobacco is one example from my own portfolio. So I am not sitting around, waiting for the recession to end. Instead, my plan of action right now is hunting for cheap shares to buy for my portfolio.
Finding inexpensive shares
But what makes a stock cheap? After all, British American Tobacco shares are around £33 each compared to just pennies for shares in Rolls-Royce or Lloyds.
Price is just that – what I pay for something. That is not necessarily the same as value, which is what something is worth.
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When I hunt for cheap shares – as I am currently doing — I look for a mismatch between today’s share price and what I think a company’s long-term value is, based on its business prospects.
A share I bought
Using this approach, I have been buying shares in Victorian Plumbing (LSE:VIC) this year.
Its shares trade for pennies, but that is not why I see them as cheap. Rather, it is because of the value I see in this prominent domestic fittings business.
In the past year, the Victorian Plumbing share price has crashed 66%. At its current price, the company has a market capitalisation of £187m. But as of last month, it had over £43m of net cash on its balance sheet. In other words, the enterprise value of the firm is around £144m right now.
Yet the company generated the same revenue last year as it did in 2021, which was a blockbuster period of sales. Indeed, the company has said that revenue, earnings, and cash flow for the full financial year all came in ahead of consensus market expectations. With results due in less than a fortnight, we will learn exactly what those profits were and also how current trading is looking.
Hunting for value
I think there is an imbalance between the strong business performance and weakening share price at Victorian Plumbing. That is why I have been buying.
There are risks, of course. Tightening household budgets could lead customers to put off expensive home renovations, hurting sales and profits. I will be studying the next trading statement for signs of that.
But Victorian Plumbing matches the definition of “cheap” that I used above.
Building a portfolio
However, I could be wrong about that. After all, retailer boohoo looked cheap to me early this year but it has continued to fall in price. It is 79% cheaper than a year ago.
I still own my boohoo shares and hope that the challenges of inflation and shifting consumer demand will not hurt it in the long term. For now, though, the share price performance is alarming. One risk of hunting for cheap shares to buy is that I can end up owning some value traps. That is why I keep my portfolio diversified – and always look for value, not simply a low price.
Cheap shares may not stay that way when lots of investors understand their value. I am not waiting to buy!
