I’m always on the lookout for cheap shares. But when I say cheap stocks, what I actually mean is stocks that are undervalued, meaning they trade for less than their intrinsic or book value.
In the past couple of weeks, we’ve experienced a stock market correction. And in this environment, it’s almost always easier to find undervalued stocks.
With a house purchase on the cards, it’s very possible that I may have no investments at the age of 30. So, how can I get rich with cheap stocks?
Let’s take a look.
The strategy
When starting with nothing, it’s important to have a long-term strategy. My preference is to use a compound returns strategy. This is essentially the process of earning interest on my interest by reinvesting year after year.
So, let’s say I can pull together £1,000 to invest in stocks after my house purchase. And then I commit to investing £500 a month, every month, and increase my commitments by 5% a year — roughly in line with hoped-for salary growth during my career.
For a compound returns strategy, I need to pick stocks paying dividends. Realistically, I can look to earn an aggregated 8% in total returns, the majority of which should come in the form of dividends.
Here’s how the strategy would work out.
| Years | Total deposits | Investment value |
| 1 | £7,000 | £7,307 |
| 10 | £76,467 | £113,656 |
| 20 | £199,396 | £433,796 |
| 30 | £399,633 | £1,258,549 |
| 40 | £725,798 | £3,275,150 |
Generating over £3m from a standing start, I think that’s pretty good. I won’t be rich beyond my wildest dreams — after all, I’ve got to take inflation into account. But it’s certainly a good figure.
Hunting undervalued stocks
In February, I would have been fairly confident in finding a handful of stocks offering sizeable yields, and some growth, that could help me hit an annualised 8% in total returns. But now, after the stock market correction, I think I could do better than that.
Financial stocks is where I would have started a month ago, and it’s where I’d start today. I’ve been buying more for my portfolio as share prices have fallen.
In short, the stock market correction, which impacted financial stocks more than most, was caused by concerns about unrealised bond losses after Silicon Valley Bank had to sell bonds at a loss. However, most analysts will contend that the panic that ensued wasn’t warranted.
Of course, there are concerns that interest rates have pushed too high, and this will hurt lenders as good debt turns bad, and borrowing slows.
However, I think this is a strong sector, which some great yields and growth opportunities. Liquidity across the banking sector is stronger than it has been for a while, and bad debt is way below levels of a decade ago.
So, these are my top picks that could help me, as part of a balance portfolio, deliver the required returns.
| Stock | Dividend yield | Month change | Year change |
| Barclays | 5.2% | -19% | -14% |
| Hargreaves Lansdown | 5.1% | -9% | -25% |
| HSBC | 4.8% | -14% | 4% |
| Legal & General | 8.2% | -10% | -14% |
| Lloyds | 5.1% | -10% | -4% |
| Phoenix Group | 9% | -4.5% | -13% |