Today’s volatile stock market may cause many investors to avoid buying cheap stocks. They may determine that other assets with lower risks are a better option than companies that face challenging operating conditions in many cases.

However, the track record of the stock market shows that buying undervalued shares can lead to high returns over the long run. As such, now could be the right time to purchase high-quality businesses that trade at cheap prices.

Here’s how you could achieve that goal, and in doing so improve your financial prospects in the coming years.

Identifying sectors with cheap stocks

Perhaps the first step to take when seeking to find cheap stocks is to identify which sectors currently offer good value for money. Although the stock market has rebounded since the market crash, some sectors continue to contain companies with extremely low valuations. In many cases, undervalued sectors have uncertain near-term outlooks that have caused investors to demand wide margins of safety.

Clearly, some sectors may be cheap for good reason. They may be unable to fully recover from the challenges they face, and the business models of their members may prove obsolete due to changing consumer trends. However, by identifying sectors with near-term challenges and long-term recovery potential, you may be able to unearth a large number of good value stocks that can be added to your portfolio.

Annual reports

Just as some sectors may be undervalued for good reason, some cheap stocks may have very undesirable future prospects. Therefore, accessing annual reports may help you to understand which companies offer recovery potential, and which businesses may fail to experience a sustained rally in the coming years.

Annual reports are free to access for any investor, and contain a vast amount of information about a business. Together with recent trading updates, they allow an investor to paint an accurate picture of the strengths and weaknesses of a business that can be used to value it. A buying opportunity may exist if its stock price is currently significantly below its intrinsic value.

Relative pricing

At the present time, it is difficult to ascertain whether cheap stocks offer good value for money on a standalone basis. Their outlooks are opaque due to a challenging economic future.

Therefore, it could be prudent to identify businesses that trade on lower valuations than their sector peers. Although no two businesses are ever identical, companies operating in the same sector and geographies are likely to face similar risks and growth opportunities. By comparing their prices, it may be possible to determine whether they offer investment appeal for the long term.

Clearly, not all cheap stocks will deliver a successful recovery. However, the track record of the stock market suggests that buying a diverse range of businesses at low prices can lead to high returns in the long run.

More reading

• How to turn $20,000 into over $200,000 in 10 year with ASX shares
• These were the best performing shares on the ASX 200 last week
• 3 of the best ASX dividend shares to buy right now
• These were the worst performing shares on the ASX 200 last week
• 3 steps I’d take when investing in today’s volatile stock market to make a million

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. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post How I’d find cheap stocks to buy in today’s market appeared first on Motley Fool Australia.

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The S&P/ASX 200 Index (ASX: XJO) was out of form last week and tumbled notably lower. The benchmark index ended the week 1.6% lower than where it started it at 5,927.8 points.

Four shares that fell more than most are listed below. Here’s why they were the worst performers on the ASX 200 index last week:

The IOOF Holdings Limited (ASX: IFL) share price was the worst performer on the ASX 200 last week with a 16% decline. Investors were selling the fund manager’s shares after the release of its fourth quarter update. During the quarter IOOF’s funds under management, advice and administration (FUMA) grew to $202.3 billion. This represents a quarterly increase of $6.7 billion or 3.4%. However, taking the shine off its FUMA update was its earnings commentary. IOOF advised that it expects to report an underlying net profit after tax of approximately $128 million to $130 million in FY 2020. This will be a ~35% decline from the $198 million it reported a year earlier.

The Sandfire Resources Ltd (ASX: SFR) share price wasn’t far behind with a 15.5% decline. Investors were selling the copper producer’s shares after a strong four quarter update was overshadowed by underwhelming guidance for FY 2021. A very positive fourth quarter led to full year copper production coming in at 72,238 tonnes and gold production totalling 42,263 ounces. This was achieved with C1 costs of 72 U.S. cents per pound. However, next year management expects copper production to reduce to between 67,000 and 70,000 tonnes and gold production to reduce to 36,000 to 40,000 ounces. But even worse, management is expecting its C1 costs to increase at least 25% to between 90 U.S. cents and 95 U.S. cents.

The IGO Ltd (ASX: IGO) share price was out of form and fell 15.1% over the period. The nickel producer’s shares came under significant pressure after its guidance for FY 2020 fell short of expectations. IGO expects its revenue to be $892.4 million and its underlying earnings before interest, tax, depreciation and amortisation (EBITDA) to come in at $459.6 million. The latter falls well short of the market’s expectations. Analysts at Macquarie, for example, were expecting EBITDA of $530 million.

The AMP Limited (ASX: AMP) share price crashed a disappointing 14.3% lower last week. This follows the release of an update on its expectations for the first half of FY 2020. The struggling financial services company revealed that it expects to report underlying profit from retained businesses in the range of $140 million to $150 million. This was below the market’s expectations and due to a range of negative factors including market volatility and a credit loss provision in AMP Bank.

More reading

• These were the best performing shares on the ASX 200 last week
• ASX 200 drops 2%, ASX banks fall, Super Retail jumps
• Why I’m worried about the US markets right now
• Latest ASX stocks upgraded by top brokers to “buy” today
• US tech shares deliver massive results – what does it mean for ASX tech shares?

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Investors have experienced a highly volatile stock market so far in 2020. Looking ahead, risks such as a continued rise in the number of coronavirus cases and geopolitical uncertainty in North America and Europe could contribute to continued heightened fears among investors.

Therefore, it may become increasingly important to build a diverse portfolio of high-quality businesses with sound finances when seeking to make a million. Furthermore, holding some cash may enable you to capitalise on temporary declines in stock prices that may occur over the coming months.

Diversification in a volatile stock market

Diversification is always a key part of investing, but may become even more crucial in a volatile stock market. Share prices could come under significant pressure across many sectors over the coming months. Therefore, if you own a wide range of businesses, the impact on your portfolio’s performance from disappointing returns among a small number of holdings is unlikely to be extreme.

With the cost of sharedealing having fallen over recent years, it is now possible for the vast majority of investors to buy a wide range of shares in order to diversify. Diversification may also boost your returns through allowing you to take advantage of the growth opportunities in a wider range of sectors at a time when it is difficult to predict which industries will prosper in a post-coronavirus world.

Financially-sound businesses

A volatile stock market may also mean that investing in financially-sound businesses becomes more important. Over the past decade, companies with weak balance sheets and questionable business models have often survived due to strong economic growth being present.

However, with the economy’s outlook being weak and consumer sentiment being at relatively low levels in many countries, only the strongest companies may prosper over the coming years. As such, focusing your capital on those businesses that have modest debt levels, strong cash flow and wide economic moats could prove to be profitable. They may not be among the cheapest shares around, but their higher quality versus sector peers could make them more attractive on a risk/reward basis.

Cash holdings

Holding some cash in a volatile stock market could be a sound move. Of course, low interest rates mean that cash is unlikely to offer a high return over the long run. It could even reduce your spending power over the coming years if inflation moves higher. Therefore, relying on it to boost your chances of making a million is not a sound idea.

However, an uncertain economic outlook means that a second market crash cannot be ruled out. This may present more attractive buying opportunities over the coming months that can be capitalised upon by investors who hold cash today. Buying high-quality stocks at even lower prices may increase your prospects of obtaining a seven-figure portfolio.

More reading

• Worried about a second stock market crash? I’d start investing like Warren Buffett
• Forget gold and Bitcoin. I’d buy cheap stocks after the market crash to make a million
• Stock market crash: why I’d grab this rare chance to buy cheap shares
• 3 ASX dividend shares for dependable income
• ASX 200 drops 2%, ASX banks fall, Super Retail jumps

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. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post 3 steps I’d take when investing in today’s volatile stock market to make a million appeared first on Motley Fool Australia.

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The risk of a second stock market crash may be causing some investors to sit on the sidelines and await greater clarity in the prospects for the global economy. However, it is during the riskiest periods for the stock market that the best investing opportunities can come along.

As such, using the value investing strategy of Warren Buffett could be a profitable move. It may enable you to invest today and generate high returns in the coming years.

A second market crash

The previous performance of the stock market suggests that a second market crash would not be a major surprise. There are still many risks facing investors that have the potential to cause a fall in investor confidence, as well as to weaken the operating environments across a wide range of industries.

Risks include a continued rise in the number of coronavirus cases, possible difficulties in the upcoming United States election, and a continued stalemate in Brexit talks. Any of those risks, as well as a great many others, could cause a fall in stock prices that undoes all of the gains made over recent months during the market rebound.

Value investing in an uncertain market

The prospect of a second stock market crash may naturally cause some investors to become fearful. They may worry about the potential for paper losses over the near term that damage their wealth, albeit on a temporary basis.

Other investors, such as Warren Buffett, view falls in stock prices as opportunities to buy cheap stocks as opposed to threats to their long-term wealth. Through having a value investing focus, you can buy the most attractive stocks available when they trade at wide discounts to their intrinsic value.

The opportunities to do so often coincide with the riskiest periods from an economic perspective. However, with no bear market or global recession having ever lasted in perpetuity, long-term investors who buy a diverse range of undervalued shares are relatively likely to enjoy impressive returns from their recovery.

Starting to invest in undervalued shares today

While the potential for another market crash may dissuade some investors from buying shares today, many stocks appear to offer wide margins of safety. This could mean that the stock market has factored in many of the risks they face, and that they offer attractive risk/reward opportunities.

Therefore, now could be the right time to start building an equity portfolio. Through focusing your capital on high-quality businesses with strong balance sheets and wide economic moats, just as Warren Buffett has done throughout his career, you could enjoy high returns in the long run. Doing so may not make you a billionaire, but it could enhance your financial future and help you to enjoy a greater degree of financial freedom in the coming years.

More reading

• 3 steps I’d take when investing in today’s volatile stock market to make a million
• Forget gold and Bitcoin. I’d buy cheap stocks after the market crash to make a million
• Stock market crash: why I’d grab this rare chance to buy cheap shares
• 3 ASX dividend shares for dependable income
• ASX 200 drops 2%, ASX banks fall, Super Retail jumps

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. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post Worried about a second stock market crash? I’d start investing like Warren Buffett appeared first on Motley Fool Australia.

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