On Friday, global stock markets suffered a mini-meltdown. Following the discovery of a new Covid-19 variant, investors panicked, sending share prices tumbling around the globe. The UK’s FTSE 100 index lost 3.6% on the day, while the US S&P 500 index dropped by 2.3%. The good news about such market dips is that they can provide opportunities to buy cheap stocks at discounted prices. Here are three lowly rated UK shares that I don’t own, but would happily buy after Friday’s discount sale.
Cheap stocks #1: British American Tobacco
The first of the cheap stocks I’d buy after Friday’s falls is British American Tobacco (LSE: BATS), a major manufacturer of tobacco, cigarettes and vaping products. Although tobacco consumption is falling in the developed world, it’s rising in developing nations. Many ethical investors wouldn’t touch BAT, because its products harm and kill. But I’m attracted to this undervalued share for its income-generating ability. After falling 2.7% on Friday, BAT shares closed at 2,541.27p, valuing the group at £58.3bn. Right now, this share is rated at 9.4 times earnings, producing an earnings yield of 10.6%. Even better, BAT offers a dividend yield of 8.5% a year — more than double the FTSE 100’s 4.1% or so. That’s very tempting to an income-seeking investor like me. But BAT has £40.5bn of net debt on its balance sheet, making it somewhat riskier than it first appears.
Recovery stock #2: Lloyds Banking Group
As a leading lender to UK homebuyers, borrowers and businesses, Lloyds Banking Group (LSE: LLOY) saw its shares become one of Friday’s biggest fallers. The Lloyds share price dived 3.69p to 46p, down 7.4% on the day and valuing the Black Horse bank at £33.7bn. This leaves the second of my cheap stocks standing 10.8% below its 52-week high of 51.58p, set on 2 November. Obviously, if the new Omicron variant is nastier than Delta, then fresh social restrictions could choke off the UK’s economic recovery. But, to me, Lloyds shares offer genuine long-term value at current levels. The bank’s stock trades on a lowly rating of just seven times earnings, for an earnings yield of 14.3%. What’s more, although Lloyds’ dividend yield is just 2.7% a year (following its suspension in April 2020), there’s plenty of scope for this to increase. Given these attractive fundamentals, I would add Lloyds to my family portfolio at current price levels.
Undervalued share #3: M&G
The third of my cheap stocks is another financial firm: asset manager M&G (LSE: MNG). On Friday, the M&G share price lost 10.95p (-5.5%) to close at 187.95p. This values the ex-Prudential arm at £4.9bn, making it a relative minnow within the FTSE 100. At their 52-week high, M&G shares peaked at 254.3p on 1 June. Today, they trade 66.35p lower, a steep discount of more than a quarter (-26.1%) from their summer high. After this heavy fall, this cheap UK share now offers a whopping dividend yield of almost 9.8% a year. That’s nearly 2.5 times the dividend yield from the wider Footsie. Also, it’s one of the highest cash yields in the entire UK stock market. For me, M&G is one of the cheapest of cheap shares to have fallen into Mr Market’s bargain bin. However, if stock markets weaken in 2021-22, then M&G’s profits, earnings and dividends might fall.
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Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco and Lloyds Banking Group. 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.
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