Warren Buffett has generally held a negative viewpoint of gold over recent decades.

While some investors have sought refuge in the precious metal during periods of economic uncertainty, he has instead purchased high-quality companies when they trade at low prices.

His strategy has been hugely successful. It has easily outperformed the stock market over the long run, and could continue to do so in future.

Therefore, rather than investing money in gold while the economy currently faces a challenging near-term future, purchasing undervalued stocks could be a more profitable move.

The risks of investing in gold

Warren Buffett’s avoidance of gold may be partly due to the track record of the stock market. Even though it has experienced numerous downturns in the past, it has always recovered from them. Therefore, a strategy that seeks to buy cheap stocks and hold them in the long run has generally been a sound means of taking advantage of the market cycle.

By contrast, many investors buy gold when economic uncertainty is high. Its defensive qualities mean that it is usually less correlated to the prospects for global GDP growth.

However, buying gold at such times can mean paying a high price that limits capital growth opportunities. Furthermore, investor sentiment has always improved following even the very worst market downturns. As such, Buffett’s strategy of banking on a recovery via cheap stocks could be far more profitable than buying gold ahead of a likely reduction in risk aversion among investors.

Warren Buffett’s focus on quality

Of course, Warren Buffett does not only seek to buy cheap stocks. He focuses on the quality of a company above all else. For him, this means identifying businesses with wide economic moats. For example, this may be a unique product, strong brand loyalty or a cost base that is significantly lower than sector peers. A wide economic moat can produce higher margins, more resilient financial performance, and faster-growing profitability in the long run.

Buffett seeks to identify high-quality companies when they temporarily trade at low prices. This may be caused by economic weakness, but could also be prompted by weak industry operating conditions. Where a company has a wide economic moat, a sound strategy to overcome short-term difficulties, and the financial means to put its plan into action, Buffett has often invested.

A long-term view

A strategy that seeks to buy high-quality companies at low prices requires a long time horizon. While the economy has always returned to growth following recessions, and the stock market has made gains following every previous downturn, it can take time for these events to take place.

Warren Buffett has an extremely long time horizon. This provides scope for all of his purchases to recover from their short-term challenges. In doing so, they have often outperformed the wider stock market and produced returns that are significantly higher than those of gold.

More reading

• 2 high quality ASX dividend shares you can buy right now
• Top brokers name 3 ASX shares to sell next week
• Why ASX miners will get a double tailwind from Biden’s US$1.9tn stimulus
• 5 things to watch on the ASX 200 next week
• 2 exciting mid-cap ASX shares to buy and hold

Motley Fool contributor Peter Stephens has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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If you’re wanting to overcome the ultra low interest rates being offered with savings accounts and term deposits, then the share market could be the answer.

Two ASX dividend shares that offer investors interest rate-beating yields are listed below. Here’s what you need to know:

Accent Group Ltd (ASX: AX1)

Although the name may not be familiar, Accent is one of Australia’s leading retailers and responsible for a number of popular retail brands. These include HYPEDC, The Athlete’s Foot, and Platypus, among others.

While some retailers have struggled over the last 12 months, Accent certainly isn’t one of them. After delivering a strong result in FY 2020, it is on course to do the same in FY 2021 thanks to the redirection of consumer spending and solid demand for leisure footwear.

One broker that has been pleased with its performance so far this financial year is Citi. In response to its recent trading update, the broker put a buy rating and $2.60 price target on its shares. It is also forecasting an 11 cents per share dividend. Based on the current Accent share price, this represents a fully franked 4.7% dividend yield.

Telstra Corporation Ltd (ASX: TLS)

This telco giant’s shares may have been a very disappointing place to have invested over the last decade, but there are signs that the good times are coming back at long last. This is due to the easing NBN headwind, rational competition, lucrative 5G internet, and a potential splitting up of the company to unlock value.

Another positive is that a number of brokers believe the dividend cuts are over and feel Telstra’s free cash flow is sufficient to maintain its 16 cents per share dividend for the foreseeable future. Goldman Sachs is one of those. Based on the latest Telstra share price, this will mean a 5.1% dividend yield. Goldman also has a buy rating and $3.80 price target on its shares.

More reading

• 5 things to watch on the ASX 200 next week
• Brokers name 2 ASX blue chips to buy
• 4 most trusted ASX companies (and the 4 least trusted)
• 2 generous ASX dividend shares to beat low rates
• Telstra (ASX:TLS) dumps NRL, AFL streaming

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia has recommended Accent Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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Once again, a large number of broker notes hit the wires last week. Some of these notes were positive and some were bearish.

Three sell ratings that caught my eye are summarised below. Here’s why top brokers think investors ought to sell these shares next week:

AGL Energy Limited (ASX: AGL)

According to a note out of Credit Suisse, its analysts have retained their underperform rating and cut the price target on this energy company’s shares to $9.50. The broker made the move after AGL announced multi-billion asset impairments last week. A good portion of these were for onerous contracts relating primarily to legacy wind farm offtake agreements. The company also spoke very negatively about the outlook for wholesale electricity prices. The AGL share price ended the week at $11.39.

Commonwealth Bank of Australia (ASX: CBA)

A note out of Morgans reveals that its analysts have retained their reduce rating and lowly $64.00 price target on this banking giant’s shares. The broker believes that Commonwealth Bank’s shares are overvalued at the current level. In light of this, it expects them to underperform the other major banks. Especially when trading conditions return to relatively normal. It feels that CBA has benefited from the perception of it being the lowest risk bank. However, it suspects that investors will soon start to place less emphasis on risk profiles and pay more attention to valuations. The Commonwealth Bank share price last traded at $88.64.

Macquarie Group Ltd (ASX: MQG)

Analysts at Citi have downgraded this investment bank’s shares to a sell rating and cut the price target on them to $120.00. According to the note, the broker is a fan of the company and sees opportunities for long term growth. However, it suspects that the market is expecting too much from the company in the near term. Particularly given the headwinds it is facing from a stronger Australian dollar and low commodity price volatility. It also feels that potential tax increases in the US would be bad news for the bank. The Macquarie share price ended the week at $134.52.

More reading

• 5 things to watch on the ASX 200 next week
• CBA (ASX:CBA) share price rises as bank cuts savings rate
• Westpac (ASX:WBC) share price to close gap with CBA (ASX:CBA) says Morgans
• ASX 200 falls 0.9%, Nick Scali reports, Vulcan jumps
• What to expect from the Commonwealth Bank (ASX:CBA) half year result

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The market is expected to kick off the week on a positive footing, but it’s the ASX miners that could be leading the charge tomorrow.

The S&P/ASX 200 Index (Index:^AXJO) is likely to follow the positive leads from Wall Street with the S&P 500 (INDEXSP: .INX) jumping 0.4%.

The market is getting excited about US President Joe Biden’s US$1.9 trillion stimulus package. It’s looking increasingly likely that this generous package will pass Congress. The disappointing US job report released on Friday will just about guarantee it.

Double benefit to ASX mining shares

While this wall of cash will lift risk assets, it will provide ASX miners with a double tailwind.

The first tailwind relates to the US dollar, which tumbled on the news. The huge stimulus will significantly add to the US government’s burgeoning debt burden. This will keep the greenback under pressure.

You can see this from the jump in the Australian dollar over the weekend. The Aussie was trading under US76 cents but popped to just under US77 cents. That may not sound like much to you, but it’s a sizable move to make in a day.

ASX miners benefitting from the weaker US dollar

The weakening US dollar in turn gave commodities a big boost. Dr Copper led other industrial metals higher with a 2% jump to US$3.63 a pound, while the gold price gained 1.2% to US$1,813 an ounce.

That’s great news for the likes of the OZ Minerals Limited (ASX: OZL) share price, South32 Ltd (ASX: S32) share price and Newcrest Mining Ltd (ASX: NCM) share price.

The falling US dollar is also likely to give the iron ore price a lift on Monday, so watch out for the Fortescue Metals Group Limited (ASX: FMG) share price and Rio Tinto Limited (ASX: RIO) share price as well.

Stimulus gift that keeps giving

The second tailwind from Biden’s US$1.9 trillion “gift” will come from economic growth. As the stimulus gives the US economy a shot in the arm, it will also brighten the outlook for global growth.

Demand for commodities is directly linked to economic activity, so the lift in sentiment will give ASX miners a second booster shot.

These trends also apply to ASX energy shares that are exposed to the oil market. The Brent crude price gained 0.9% to US$59.34 a barrel over the weekend. This should see the Santos Ltd (ASX: STO) share price and Woodside Petroleum Limited (ASX: WPL) share price rise on Monday too.

Not all ASX shares are winners

On the flipside, large cap ASX industrial shares could lose some favour despite the positive market sentiment. Many of these companies sell products in US dollars and the income they make will be lower when converted back into the local currency.

Fortunately, this isn’t enough to rain on the bull market’s parade.

More reading

• 5 things to watch on the ASX 200 next week
• These were the best performing ASX 200 shares last week
• These were the worst performing ASX 200 shares last week
• ASX 200 rises 1%, Zip soars, REA reports
• Short sellers doubling down on these ASX stocks despite the GameStop saga

Motley Fool contributor Brendon Lau owns shares of Newcrest Mining Limited, OZ Minerals Limited, Rio Tinto Ltd., Santos Limited, and South32 Ltd. Connect with me on Twitter @brenlau.

The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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It certainly was a fantastic five days for the S&P/ASX 200 Index (ASX: XJO) last week. The benchmark index jumped 3.5% over the period to end it at 6,840.5 points.

There’s another busy week ahead for investors starting Monday. Here are five things to watch:

ASX futures pointing a fraction higher

As things stand, the ASX 200 is expected to open the week slightly higher on Monday. According to the latest SPI futures, the benchmark index is poised to rise 5 points at the open tomorrow. This follows a positive end to the week on Wall Street, which saw the Dow Jones rise 0.3%, the S&P 500 climb 0.4%, and the Nasdaq push 0.6% higher. The S&P 500 rose 4.7% over the five days, which was its best weekly performance since November.

Bank results begin

The banking sector will come into focus next week when a number of updates are released. Chief among them will be the half year result of Australia’s largest bank, Commonwealth Bank of Australia (ASX: CBA), on Wednesday. Goldman Sachs is expecting the bank to report cash earnings from continuing operations (pre-one offs) of $3,692 million and an interim dividend of $1.25 per share. Before this, on Tuesday Macquarie Group Ltd (ASX: MQG) and Suncorp Group Ltd (ASX: SUN) will be releasing their own updates.

Telstra half year results

On Thursday all eyes will be on the Telstra Corporation Ltd (ASX: TLS) share price when it releases its half year results. According to a note out of Goldman Sachs, it expects Telstra to report an 8% decline in revenue to $12,318 million and a 15% decline EBITDA to $3,971 million. Despite this, the broker is expecting the Telstra board to maintain its 8 cents per share interim dividend.

Property companies report

Investors will be able to see how badly the COVID-19 pandemic has impacted commercial property next week when a number of the biggest players in the industry report their earnings. This includes DEXUS Property Group (ASX: DXS) on Tuesday and Mirvac Group (ASX: MGR) on Friday.

Challenger half year update

The Challenger Ltd (ASX: CGF) share price will be one to watch on Tuesday when it releases its half year results. According to a note out of Morgans, it believes the annuities company is tracking in-line with its FY 2021 guidance at this stage. For the half, it is forecasting half year underlying profit before tax of $204 million and an interim dividend of 9.8 cents per share.

More reading

• These were the best performing ASX 200 shares last week
• These were the worst performing ASX 200 shares last week
• ASX 200 rises 1%, Zip soars, REA reports
• Brokers name 2 ASX blue chips to buy
• Short sellers doubling down on these ASX stocks despite the GameStop saga

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Challenger Limited, Macquarie Group Limited, and Telstra Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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Some mid-cap ASX shares could be interesting ideas to own for the longer-term.

A mid cap share usually has a market capitalisation of between $2 billion and $10 billion.

Here are two ideas:

A2 Milk Company Ltd (ASX: A2M)

A2 Milk is a large infant formula business listed on the ASX. Before COVID-19 came along the company was growing in Asia, North America, Australia and New Zealand.

But there has been significant disruption to the domestic daigou channel because of Australia’s closed borders. There are less visitors from places like China.

A2 Milk has explained that the daigou channel is important for activating other sales channels such as cross border e-commerce (CBEC). The company is going to work hard over the rest of FY21 to reactivate this channel.

However, the mid-cap ASX share is positive about a few parts of the business despite FY21 being far below what the company was originally hoping for. 

For example, in China its mother and baby store (MBS) segment is going well. In a recent trading update the company said that its MBS revenue remains “very strong” and it’s expecting revenue growth of more than 40% compared to the prior corresponding period. Its 12-month rolling market value share in MBS was 2.3% at the end of October.

The company said that notwithstanding the channel disruption, it’s still showing strong underlying brand health metrics in China. Its most recent research highlighted trends in lead indicators such as awareness and intention to purchase. It’s continuing to see a positive impact from the marketing investment in activation and brand building activities supported by the ground capability investments it has made over the last year and a half to two years. As a result, A2 Milk is confident about the underlying strengths of the business and will continue its high level of investment in marketing during the rest of the financial year.

Another positive in the update was that its liquid milk businesses in Australia and the USA have performed well through the first half, with both businesses recording strong first half growth compared to the first half of FY21.

At the current A2 Milk share price it’s trading at 23x FY22’s estimated earnings according to Commsec.

Altium Limited (ASX: ALU)

Altium is one of the world’s largest electronic PCB software businesses. The mid-cap ASX share says that Altium Designer is the most widespread professional PCB design tool used by over 100,000 engineers.

At 15 November 2020, Altium 365 – the world’s first digital platform for the design and realisation of electronics hardware – had 7,486 active users and 3,739 active accounts. Both of those measures were up 40% since July.

Altium says that it’s among the fastest growing electronic design automation (EDA) companies with nine consecutive years of double digit revenue growth and an expanding earnings before interest, tax, depreciation and amortisation (EBITDA) margin over the years.

The mid-cap ASX share is debt free and the cash balance continues to grow, whilst paying a steadily rising dividend. In FY20 its cash balance rose 16% to US$93.1 million and the dividend grew by 15% to AU$0.39 per share.

The mid-cap ASX is focused on growing the cloud product, Altium 365. It says that the move is from a position of strength and does not force its customers to change either their licensing model or the way they use Altium’s existing software.

Altium says that the cloud business is its transformation engine and provides unique opportunities for direct monetisation. It can make transaction fees on manufacturing (like an Airbnb model) and/or it can make money from premium services (like an Amazon Prime model).  

At the current Altium share price it’s trading at 54x FY22’s estimated earnings according to Commsec.

More reading

• 2 outstanding ASX growth shares that could be strong buys
• 2 ASX dividend shares offering big yields today
• 3 compelling ASX tech shares to buy
• 2 ASX shares rated as buys by brokers
• 2 fantastic ASX shares to buy this month

Tristan Harrison owns shares of Altium. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Altium. The Motley Fool Australia owns shares of and has recommended A2 Milk. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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If you’re looking to bolster your portfolio with some growth shares, then you might want to take a look at the ones listed below.

Here’s why these quality ASX growth shares have been tipped as ones to buy right now:

Altium Limited (ASX: ALU)

The first ASX growth share to look at is Altium. It is the printed circuit board (PCB) design software provider behind the popular Altium Designer platform. Over the last few years, Altium has earned itself a leading position in a growing electronic design market.

But management isn’t settling for that and is now aiming to dominate this market with its cloud-based Altium 365 product. And while the short term will be tough because of the COVID headwinds it is facing, the future remains very bright. This is thanks to the proliferation of electronic devices globally, which is driving demand for specialist design software.

Analysts at Credit Suisse are positive on its future. The broker currently has an outperform rating and $35.00 price target on Altium’s shares.

IDP Education Ltd (ASX: IEL)

Another growth share to look at is IDP Education. It is a provider of international student placement and English language testing services. The company is also co-owner of the high stakes language test, IELTS. It has been operating for almost 50 years and has offices in over 30 countries.

Given how international student travel has come to a standstill, IDP Education has been hit hard by the pandemic. However, the company has a very strong balance sheet, which appears to have put it in a strong position to win market share once the crisis passes.

Analysts at Morgans are fans of the company and currently have an add rating and $25.09 price target on its shares. They believe that IDP Education is well placed for growth once trading conditions return to normal.

More reading

• 2 ASX dividend shares offering big yields today
• 3 compelling ASX tech shares to buy
• 2 fantastic ASX shares to buy this month
• ASX 200 Weekly Wrap: Reality (and GameStop) finally hits ASX
• 2 quality SaaS ASX shares to buy in February 2021

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Altium. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Idp Education Pty Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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There are some ASX shares that a number of brokers like and have rated as ‘buys’

It can be quite hard to find good businesses that are trading at a good price. One investor might say that BHP Group Ltd (ASX: BHP) is a good buy, whilst another might say that Woolworths Group Ltd (ASX: WOW) is the share to buy.

Brokers are constantly looking at businesses and share prices, thinking about what would be a good investment. There are various brokers out there like Bell Potter, Macquarie Group Ltd (ASX: MQG) and UBS that provide different recommendations about shares.  

With that in mind, these ASX shares are liked by more than one broker. Of course, this still isn’t a guarantee of success – they could all be herding together.

Sonic Healthcare Ltd (ASX: SHL)

Sonic Healthcare is a global pathology business that’s currently involved in testing for COVID-19. It says that it has a pivotal role.

The ASX share is currently liked by at least four brokers.

It has operations across the world in North America, Europe and Australia. The northern hemisphere is/has been going through a second wave of the pandemic, leading to record testing in Europe.

Sonic is a market leader or major player across those markets. It’s a market leader in Australia, Germany UK and Switzerland. It’s a major player in Belgium and the USA.

In FY20 it grew revenue by 11% and underlying net profit increased by 7%.

The ASX share’s base laboratory business revenue (excluding COVID-19 testing) is up on prior levels in most countries, with negative but improving growth in the USA and UK. Strong COVID-19 testing volume is on top of this.

In a trading update, Sonic Healthcare said that its revenue was up 29% in the first quarter of FY21 to $2.1 billion and its earnings before interest, tax, depreciation and amortisation (EBITDA) went up 71% to $580 million.

In the AGM update it revealed that its October 2020 revenue was 33% higher than October 2019.

Brokers like Morgan Stanley thinks that the elevated levels of COVID-19 testing will more than offset any headwinds related to Sonic’s base pathology business.  

Audinate Group Ltd (ASX: AD8)

Audinate owns the Dante platform, which distributes audio signals across computer networks. The company boasts about being the lead supplier of digital and audio video networking for the professional AV industry.

The ASX share is liked by at least two brokers.

Brokers such as UBS said that Audinate is recovering better than expected, which the broker thought was impressive considering the difficult operating environment that it’s currently operating in.

Despite the stronger Australian dollar, UBS thinks the Audinate growth will be stronger than any headwinds being presented.

For the first half of FY21, Audinate made US$11.1 million of revenue which was a 19.3% increase compared to the second half of FY20 and in line with the first half of FY20. This translated to $15.4 million in Australian dollar terms.

At the time of the FY21 trading update, Audinate CEO Aidan Williams said: “Our first half revenue result is pleasing, yet we remain cautious of the near-term economic uncertainty associated with the ongoing impacts of COVID-19 around the world. However, our strong balance sheet has enabled us to remain focused on our medium-term strategic priorities.”

More reading

• 2 of the best ASX dividend shares to buy today
• 2 COVID-19 amplified ASX shares to buy
• 2 buy-rated small cap ASX shares with strong growth potential
• 3 ASX 200 shares that keep growing their dividends
• Leading brokers name 3 ASX shares to buy today

Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of AUDINATEGL FPO. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. The Motley Fool Australia owns shares of Woolworths Limited. The Motley Fool Australia has recommended AUDINATEGL FPO and Sonic Healthcare Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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Although the Reserve Bank didn’t cut rates last week, it hasn’t stopped the banks from cutting savings rates.

Fortunately, even though the market has rallied strongly in recent months, there are still plenty of dividend shares offering generous yields. Here are two to take a closer look at:

Aventus Group (ASX: AVN)

The first dividend share to look at is Aventus. It is Australia’s largest fully-integrated owner, manager, and developer of large format retail centres.

At the last count, the company owned a total of 20 centres with 536,000m2 in gross leasable area and 593 quality tenancies. Importantly, from these tenancies, national retailers make up ~87% of the total portfolio, with a good portion of these having exposure to the household goods sector.

Given the redirection of consumer spending and the thriving housing market, this appears to have left Aventus well-placed to collect the majority of rent as normal this year.

One broker that expects this to be the case is Goldman Sachs. It currently has a buy rating and $2.79 price target on its shares. Goldman is also estimating that it will pay a ~16.5 cents per share distribution this year. Which based on the current Aventus share price, will mean a 5.9% yield.

Rural Funds Group (ASX: RFF)

Another ASX dividend share to look at is Rural Funds. It is a real estate investment trust which owns a diversified portfolio of high quality Australian agricultural assets that are leased to experienced agricultural operators.

It generates revenues from long-term leases (WALE of 10.9 years) across five sectors: almonds, cattle, vineyards, cropping, and macadamias.

Rural Funds has an aim of delivering distribution growth of 4% per annum by owning and improving farms that are leased to quality counterparties. 

In line with this, the company intends to increase its distribution to 11.28 cents per share in FY 2021. Which based on the current Rural Funds share price, works out to be a generous 4.6% yield.

More reading

• 3 ASX dividend shares to own for retirement income
• 2 ASX dividend shares for steady income in retirement
• These ASX dividend shares offer attractive yields
• 3 reasons why Rural Funds (ASX:RFF) is a strong ASX dividend share
• 3 ASX dividend shares with yields above 4%

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended RURALFUNDS STAPLED. The Motley Fool Australia has recommended AVENTUS RE UNIT. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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A strategy of buying and holding undervalued stocks has generally been successful in obtaining high returns.

It means purchasing high-quality companies when they trade at prices that do not take into account their long-term growth potential. They may offer scope for capital growth, as well as lower risks than lower-quality businesses.

With many companies trading at low prices, there may be opportunities to buy undervalued shares today. Here’s how I’d seek to find them.

Finding undervalued stocks in unloved industries

At any given time, there are always some industries that are favoured by investors, and others that are unloved. Undervalued shares may be more likely to be found in the latter, since valuations may be lower. This may provide scope to buy shares that offer wide margins of safety.

At the present time, industries that face challenging short-term operating environments are relatively unpopular among investors. They could, therefore, be the best places to start searching for undervalued shares. Industries such as banking, consumer goods and resources have been negatively impacted by the global economic slowdown and policymakers’ response to it. This may mean that they trade at low prices relative to their historic averages.

Although the financial performances of undervalued shares may reflect their low valuations in the short run, over the long term the past performance of the economy shows that a recovery is very likely. Through holding them over the coming years, it may be possible to capitalise on improving financial performance, as well as stronger investor sentiment.

Focusing on company releases

Within unpopular sectors, undervalued stocks are likely to be those businesses that have a mix of financial strength, solid strategies and the market position to deliver on their goals.

A simple means of finding out whether a business has these three criteria is to analyse its latest investor updates. For example, its latest annual accounts can provide guidance on its financial strength, while recent trading updates may paint a picture of the relative success of its strategy.

Together, this information can allow an investor to piece together whether the company in question has the means to deliver improving financial performance. Based on this, they can value a stock and determine whether it is undervalued at its current price level.

A prudent approach to buying shares

Undervalued stocks often face short-term difficulties. Otherwise, they are unlikely to be priced at a level that is below their intrinsic value.

As such, it is important to build a diverse portfolio of such companies instead of relying on a small number of them for growth. Otherwise, an investor may become overly exposed to a small number of businesses. Should they fail to deliver on their long-term potential, it could mean disappointing overall returns. Furthermore, diversification provides access to a wider range of businesses that can mean higher return potential in a recovering stock market.

More reading

• Got money to invest? Here are 2 ASX shares to buy
• 2 ASX shares to own according to fund managers
• How to turn $20,000 into $1 million in 10 years with ASX shares
• These were the best performing ASX 200 shares last week
• How to make a yearly income of $60,000 from ASX shares

Motley Fool contributor Peter Stephens has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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