I think it’s possible for me to build a million-pound portfolio by buying a few cheap shares with serious growth potential.
After all, investing in undervalued shares with a long-term outlook is a proven strategy for building wealth.
What do I mean by “cheap” shares? I’m talking about companies whose share prices I deem to be significantly undervalued relative to their long-term potential.
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So, what would my strategy be?
Diversification vs concentration
One option involves me buying cheap shares in lots of different companies to build a diversified portfolio. The advantage of this approach is that it represents a powerful risk-reducing strategy.
A different strategy I could use involves buying fewer shares (say, 10-15) and opting for a more concentrated portfolio. The advantage of this approach is that has the potential to increase gains by sticking to fewer stocks.
Whilst both options represent viable investment strategies, I think concentration is a better way for me to achieve a million-pound portfolio.
In this way, my primary aim is to focus on a manageable number of high-quality and undervalued stocks.
High-quality undervalued shares
Finding high-quality shares trading on the cheap is tricky. Whilst there are plenty of good companies with valuations I judge to be undervalued, there are a few things I’m always on the lookout for before taking the plunge.
For example, I look for companies with low price-to-earnings (P/E) ratios. Why? Well, a low P/E ratio suggests to me that the company’s shares could be undervalued.
I’m also keen to identify companies I think have particularly strong commercial prospects regardless of their current share price. Once identified, I wait patiently for opportunities to add them to my portfolio at an attractive price.
Once the foundations of my portfolio are in place, I’d aim to invest around £375 a month over the next 35 years. For the purposes of illustration, if I managed a yearly compound return of 9%, my final pot will be worth £1,017,396.
Cheap shares: one to watch
One such company whose shares I’ve currently got my eye on is Mondi (LSE:MNDI). The multinational packaging and paper firm performed impressively last year despite facing major challenges.
Full-year results for 2022 illustrate the strong performance, with underlying EBITDA and profit before tax up 60% and 119% respectively.
What I particularly like about Mondi is the strategic flexibility provided by its cash generation and strong balance sheet. In my view, this means the company will be able to respond to growing consumer demand for sustainable products by investing in alternatives to strengthen its market position.
On top of this, the company has long been a consistent dividend payer and currently boasts a generous yield of 4.6%.
However, the company is still grappling with higher input costs caused by wider geopolitical and microeconomic uncertainty. Softer demand and pricing also poses a threat to continued strong financial performance.
Nevertheless, with a P/E ratio of 8.1, the company’s share price looks undervalued to me. If I had the spare cash, I’d buy Mondi shares as part of my overarching strategy to make a million by hoovering up cheap shares and aim for that 9% annual return.
