According to the latest weekly economic report out of Westpac Banking Corp (ASX: WBC), its team continue to forecast the cash rate remaining on hold at 0.25% until at least the end of 2021.

At this point, I can’t see any reason to believe that this forecast won’t prove accurate. Which, unfortunately for income investors, means that interest rates are likely to stay at ultra low levels for some time to come.

But don’t worry, because the two ASX dividend shares listed below could help you beat low interest rates. Here’s why I like them:

Commonwealth Bank of Australia (ASX: CBA)

The first dividend share I would consider buying to beat low interest rates is Commonwealth Bank. Although the banking giant’s shares have recovered strongly over the last few months, I still see a lot of value in them at the current level. This is especially the case for income investors due to the bank’s generous yield.

While I think Commonwealth Bank will have to cut its dividend one final time in FY 2021, I’m optimistic the cut won’t be as severe as some believe. Based on my belief that the economic damage from the pandemic won’t be as bad as first feared, I’m pencilling in a ~$3.70 per share dividend next year. If this proves accurate it will mean a forward fully franked yield of 5.3%.

Rio Tinto Limited (ASX: RIO)

Another dividend share that I would buy to beat low rates is this mining giant. I believe the company is well-placed to deliver bumper free cash flows over at least the next couple of years thanks to the high prices that iron ore is commanding. For example, in FY 2020 Rio Tinto expects its Pilbara iron ore unit costs to be US$14 to US$15 per tonne. This compares to the benchmark iron ore price of over US$100 per tonne.

And given the strength of its balance sheet, I believe Rio Tinto is likely to return the bulk of its free cash flow to shareholders in FY 2020 and FY 2021. In light of this, I estimate that its shares offer a forward fully franked dividend yield of at least 5%.

More reading

• A good time to buy Commonwealth Bank shares?
• How I’d build a $100,000 portfolio for ASX dividend shares
• ASX 200 rebounds 1.5%, Qantas drops on capital raising
• ASX banks told to dip into capital buffers to “support businesses and households”
• ASX 200 rebounds 1.1%: Big four banks charge higher, Qantas sinks after raising $1.4bn

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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Commonwealth Bank of Australia (ASX: CBA) shares continue to lag behind 2 of the other 3 major banks. Both National Australia Bank Ltd. (ASX: NAB) and Australia and New Zealand Banking GrpLtd (ASX: ANZ) have risen by ~32% from 23 March. Yet CBA shares are up only ~27%. This places it on equal footing with beleaguered Westpac Banking Corp (ASX: WBC). A bank undergoing investigation by the ACCC.

Personally, I believe the CBA share is worth further investigation.

Setting up for growth

On 15 March CommBank announced it would be selling 55% of Colonial to US private equity firm KKK for AUD$1.7 billion. This provides additional capital for the bank at a time when it has set aside $1.5 billion for impacts from the coronavirus. This deal caused ASIC to pursue civil proceedings against the bank for issues arising from the Royal Commission. 

However, I do not think CommBank shares will be impacted too much. The bank indemnified KKK against all impacts from the Royal Commission in the purchase arrangement. 

Secondly, and far more exciting is the bank’s entry into the buy now pay later (BNPL) market. 

CommBank announced it was to launch Swedish private fintech, Klarna in Australia on 30 January. A plan later derailed by the COVID-19 outbreak. CommBank holds a 5.5% stake in Klarna, increased from its original 1.8% holding. The companies will jointly fund and have 50:50 ownership rights to Klarna’s Australian and New Zealand business. It is worth mentioning that Klarna is the originator of the BNPL approach and is currently the largest in the world. 

CommBank is the nation’s largest provider of digital payments services. This means the Klarna BNPL service can be immediately available across Australia. This is a significant threat to Afterpay Ltd (ASX: APT) as the dominant player in the Australian market. However, it will also threaten any other BNPL that has a service offering purely in Australia. 

Robust position

CommBank was the first Aussie bank to signal its intention to cut back on COVID-19 support by 30 June. CommBank will likely be the first of the majors to start to see loan defaults for those customers unable to pay. In addition, the bank is the largest provider of home loans and business loans in Australia. Nonetheless, it has already made a $1.5 billion provision to pay for defaults.

In addition, Colonial is more likely to increase earnings while managed as part of the core business of a private equity firm.

CBA shares are presently trading at a price to earnings (P/E) ratio of 12.4. At the time of writing, based on the current price, CBA shares have a trailing 12-month dividend yield of 6.27%. Moreover, while dividends are currently deferred, I cannot see the banks reducing or permanently cancelling dividend payments. It is the core reason why many funds hold the banks.

Foolish takeaway

I think our largest bank is good value for money right now. It has set itself up for growth in the near future and is managing its response to the coronavirus in a very fiscally responsible manner. At the current price I believe investors will see solid share price growth in the medium term, as well as securing a solid dividend payment once they recommence. 

More reading

• Could the Afterpay share price really be good value right now?
• ASX 200 rebounds 1.5%, Qantas drops on capital raising
• ASX banks told to dip into capital buffers to “support businesses and households”
• ASX 200 rebounds 1.1%: Big four banks charge higher, Qantas sinks after raising $1.4bn
• Why AMP, IOOF, Redbubble, & Westpac shares are charging higher

Motley Fool contributor Daryl Mather has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of AFTERPAY T FPO. 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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The ASX telco sector has gone through some dramatic changes since I first started covering it as a telecommunications analyst over 25 years ago.

The Australian telco landscape has particularly changed in the past 10–15 years through a string of mergers and acquisition. The number of major telco providers has more than halved to just 5.

The other major change is that the National Broadband Network (NBN) has created a level playing field for the residential telco market. Prior to this, for several decades, Telstra Corporation Ltd (ASX: TLS) was the undisputed king, as it owned the national network.

In this article, I will briefly take you through the 4 major ASX-listed telco companies in Telstra, Vocus Group Ltd (ASX: VOC), TPG Telecom Ltd (ASX: TPM) and Macquarie Telecom Group Ltd (ASX: MAQ) and I’ll share my top telco pick right now.

Telstra

Telstra previously owned the national fixed-line network for broadband and voice. Therefore, it was able to set the price that it charged to other telcos using its network. This flowed through to high margins and high company profits.

Then came along the NBN…

Telstra’s T22 strategy will help address the subsequent reduction in revenues and profitability. It will help reduce underlying fixed costs by $2.5 billion annually by the end of FY22. Telstra recently revealed that it is on track to achieve most of the goals it has in place as part of this strategy.

Telstra also hopes to grow its market share over the next 5 years on the back of its market-leading 5G offering.

Vocus Group 

Vocus is a specialist fibre and network solutions provider. It mainly targets the enterprise, government, wholesale and small business markets. Vocus also has a smaller presence in the residential sector offering fixed broadband.

It has grown significantly in scale since 2015, merging with retail telco, M2 Communications. It also acquired enterprise-focused Amcom and Nextgen Networks.

Over the past few years, Vocus’ retail division has struggled. This is mainly due to tight margins offered to retail-fixed broadband operators under the NBN. However, a 3-year turn-around strategy is putting Vocus back on track.

TPG Telecom 

TPG saw its share price rise higher between 2011 and 2016 on the back of a series of acquisitions. This included retail telcos AAPT and iiNet. It became the second-largest fixed broadband provider after Telstra. However, due to lower retail margins for fixed broadband on the NBN, TPG has struggled in recent years.

This trend is reflected in TPG’s recent financial results for 1H20. Total revenue only grew by a very modest 1% for 1Ht, while underlying earnings before interest, taxes, depreciation, and amortization (EBITDA) declined by 6%.

However, TPG’s recent merger with Vodafone positions it well to compete in the mobile market against rivals, Telstra and Optus.

Macquarie Telecom 

Lesser-known Macquarie Telecom services the enterprise and government telco sectors.

Specialist telco services extend to data centres, cloud computing and cybersecurity. Macquarie Telecom has seen strong share price growth on the back of strong demand in these 3 core market segments, especially cybersecurity.

For the six months ended December 31, it delivered a 9% increase in revenue on the prior corresponding period to $131.9 million.

My top ASX telco share pick?

My top pick right now is Telstra, but only just… I believe that with NBN headwinds declining further over the next year, and the potential of a gain in mobile market sales on the back of its 5G rollout, it is well placed for growth.

Macquarie Telecom’s recent growth has been impressive, but I am still unsure if it can maintain this momentum over the long term. Competition in the data centre space, in particular, continues to climb.

More reading

• How I’d build a $100,000 portfolio for ASX dividend shares
• ASX 200 rebounds 1.5%, Qantas drops on capital raising
• Is Telstra in for a bruising fight with merged TPG-Vodafone?
• These are the 4 cheapest ETFs on the ASX
• Why I think Telstra and these ASX dividend shares are strong buys

Motley Fool contributor Phil Harpur owns shares of Telstra Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited. 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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The Afterpay Ltd (ASX: APT) share price has rocketed 94.67% since the start of the year to become a leader amongst ASX 200 shares.

This is despite falling to a 52-week low of $8.01 in the March bear market. Amazingly, the Afterpay share price closed the week at $57.00 which means the buy now, pay later company is worth a whopping $15.2 billion.

Why the Afterpay share price is rocketing higher?

I think there are a few factors behind Afterpay’s recent share price moves.

For one, the company has continued on its strong growth trajectory despite coronavirus disruptions. Many people turned to online shopping as bricks and mortar retailers were forced to closed during lockdowns.

This meant that, while some sales channels were softer for Afterpay, its online turnover was booming.

Another big factor I believe has been pivotal to the phenomenal growth in the Afterpay share price is the fact the company has minimal debt on its balance sheet. This means it can operate freely without having to worrying about creditors. In short, no one can really force Afterpay’s hand on key issues given its low leverage.

But despite Afterpay shares hitting record high after record high, are they really a good buy in 2020?

Is Afterpay a good value buy?

One thing I would say about the buy now, pay later space is that it looks a little overcrowded right now.

While Afterpay seems to be an industry leader, it does have the likes of Openpay Group Ltd (ASX: OPY) and Zip Co Ltd (ASX: Z1P) snapping at its heels.

I suspect we may see more industry consolidation throughout 2020 and 2021. With so many high growth companies operating in the space, as well as international competitors like Klarna, I’m not sure there’s room for all of them.

The Openpay share price has rocketed more than 370% higher since mid-March while Zip Co also continues to post strong monthly trading updates.

I’m not backing one particular horse in this buy now, pay later industry race. However, if Afterpay can post another bumper result in August, then I think it’s very possible we could see its share price hit $100 by the end of the year.

More reading

• Do you want to get rich by investing? Then do this
• Why National Storage shares are a great “set and forget” option for your portfolio
• Purchasing Openpay shares in March in would have pocketed you this return
• Could one of these ASX shares be ‘the next Afterpay’?
• Why Xero and these ASX tech shares just hit record highs

Ken Hall has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of ZIPCOLTD FPO. The Motley Fool Australia owns shares of AFTERPAY T FPO. 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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Buying cheap shares today may not produce an impressive return in the short run. After all, the world economy faces a period of significant uncertainty caused by coronavirus. Lockdown measures are likely to cause rising unemployment and lower GDP growth across many major economies that could lead to difficult operating conditions for many listed companies.

However, through buying undervalued shares today you could take advantage of the stock market’s cyclicality and its long-term recovery potential. This could improve your chances of retiring early.

Buying cheap shares

At the present time, an uncertain economic outlook may dissuade some investors from buying cheap shares. Risks such as a second wave of coronavirus and increasing trade tensions between the United States and China could mean that the stock market experiences a challenging period that limits its scope for capital growth.

However, often the best times to buy stocks have been when their outlooks are highly uncertain. Risks mean that investors demand wider margins of safety. This could allow you to purchase stocks while they trade at even lower prices, and when they offer even greater capital growth potential.

Value investing appeal

Purchasing cheap shares allows an investor to take advantage of the stock market’s cyclicality through buying businesses when they trade at low prices and selling them when they trade at higher prices.

On a long-term basis, following a value investing strategy has been highly successful for a range of investors. They include Warren Buffett, who has been able to ignore other investors during bear markets and recessions to purchase high-quality companies at low prices. Through holding them over the long run, it is possible to obtain high returns that improve your retirement prospects.

Risk management

Of course, assessing the quality of the companies you purchase is a means of limiting risks when buying cheap shares. Through focusing your capital on those businesses that have solid balance sheets and wide economic moats, you can reduce your chances of experiencing losses in the short run. Such companies may also be able to strengthen their competitive positions to generate higher returns in the long run through increasing their market share at the expense of weaker rivals.

Furthermore, diversifying across a wide range of businesses could improve your portfolio’s risk/reward ratio. It may reduce your reliance on a small number of stocks to produce your returns, which could enhance your long-term growth rate. It may also allow you to invest in a wider range of fast-growing sectors than would otherwise be the case.

With the stock market having always recovered from its challenging periods to post long-term gains, now could be the right time to build a portfolio of stocks that can benefit from a likely improvement in the economy’s growth rate in the coming years. Doing so could increase your chances of retiring early.

More reading

• Could the Afterpay share price really be good value right now?
• How I would construct a $50,000 growth portfolio
• These were the best performing ASX 200 shares last week
• These were the worst performing ASX 200 shares last week
• Here are 2 dirt cheap manufacturing shares to buy next week

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.

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If you are looking to construct a portfolio, I think it’s important to build it with your goals and risk profile in mind.

This means that if you’re in your 20s or 30s, your portfolio is likely to look very different to someone that is approaching retirement.

On this occasion, I’m going to look at constructing a $50,000 growth-orientated portfolio which I believe could provide strong returns over the long term.

Here’s how I would build it:

Altium Limited (ASX: ALU)

I would invest $5,000 into this electronic design software company. Although FY 2020 has been a disappointment because of the pandemic, I believe its long term outlook remains extremely positive. This is because of the Internet of Things boom, which is expected to drive strong demand for its software over the next decade.

BetaShares NASDAQ 100 ETF (ASX: NDQ)

I think investors should consider the BetaShares NASDAQ 100 ETF as a core holding in this portfolio. This is because this ETF gives investors exposure to many of the biggest and arguably best companies in the world such as Amazon, Apple, Facebook, and Microsoft. I would allocate $20,000 to this ETF.

CSL Limited (ASX: CSL)

As the Nasdaq 100 ETF is tech-heavy, with approximately 47% of the fund weighted to the sector, I think balancing things out with some healthcare shares would be a good idea. And what better healthcare share to buy than this biotherapeutics giant. Due to its high quality therapies, expansive plasma collection network, and lucrative R&D pipeline, I believe it is well-placed for growth during the 2020s. I would invest $10,000 into CSL’s shares.

Domino’s Pizza Enterprises Ltd (ASX: DMP)

I would invest $5,000 into Domino’s Pizza. I believe the pizza chain operator could provide strong returns for investors over the next decade. This is thanks to its store expansion plans, the popularity of its pizzas, and its same store sales targets. Combined, I expect Domino’s to deliver solid earnings growth over the long term.

Kogan.com Ltd (ASX: KGN)

I think Kogan is a great way to gain exposure to the retail sector. Especially now that more and more consumer spending is being made online. Due to its strong market position, popular website, and acquisition plans, I believe the ecommerce company can grow at a very strong rate over the next decade. I would invest $5,000 into its shares.

ResMed Inc. (ASX: RMD)

Another healthcare share to invest $5,000 into is ResMed. I believe the sleep treatment-focused medical device company can be a market beater over the next decade. This is thanks to the proliferation of sleep disorders and its industry-leading masks and software.

More reading

• The Kogan share price has quadrupled in value since March: Is it too late to invest?
• 2 ASX shares to ride out a second wave of coronavirus
• Brokers name 3 ASX 200 shares to buy today
• These 2 ASX shares are perfect for a beginner investor
• Why Kogan, Myer, Orocobre, & Qantas shares are dropping lower

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 Altium, BETANASDAQ ETF UNITS, CSL Ltd., and Kogan.com ltd. The Motley Fool Australia has recommended BETANASDAQ ETF UNITS, Domino’s Pizza Enterprises Limited, Kogan.com ltd, and ResMed Inc. 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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The S&P/ASX 200 Index (ASX: XJO) was out of form last week amid concerns over a spike in coronavirus cases.

And although the benchmark index charged 1.5% higher on Friday, it wasn’t enough to take the ASX 200 into positive territory. The index finished the week 0.7% lower than where it started it at 5904.1 points.

Not all shares tumbled lower with the market. Here’s why these were the best performers on the ASX 200 last week:

The Western Areas Ltd (ASX: WSA) share price was the best performer on the index last week by some distance with a 22% gain. Investors were buying the nickel producer’s shares after it revealed very positive drilling results from its Sahara prospect within the Western Gawler project in South Australia. In addition to this, its shares were given a boost by a bullish broker note out of Ord Minnett. It upgraded its shares to a buy rating with an improved price target of $3.30.

The Saracen Mineral Holdings Limited (ASX: SAR) share price was the next best performer with a 13.6% gain. Investors were buying Saracen and other gold miners last week after the price of the precious metal jumped to its highest level since 2012. Also climbing higher for the same reason was the Perseus Mining Limited (ASX: PRU) share price with a 9.9% gain.

The Fisher & Paykel Healthcare Corp Ltd (ASX: FPH) share price was on form last week and recorded a 10.2% gain. Investors appear to have been buying the medical device company’s shares on the belief that it will deliver a strong full year result next week. In addition to this, a potential second wave of coronavirus could lead to increasing demand for its ventilators. It was partly for the latter that analysts at Macquarie upgraded its shares to an outperform rating last week.

The Sandfire Resources Ltd (ASX: SFR) share price wasn’t far behind with a 9.8% gain. This appears to have been driven by a broker note out of UBS last week. Its analysts upgraded the copper miner’s shares to a buy rating with a $6.00 price target. It made the move after a sharp pullback in its share price and improvements in the copper price.

More reading

• Wesfarmers and one more ASX share I’d buy in another market crash
• How I’d build a $100,000 portfolio for ASX dividend shares
• ASX 200 rebounds 1.5%, Qantas drops on capital raising
• The latest ASX shares to be upgraded by top brokers to “buy”
• Add the WOW factor to your investment portfolio. Why I think the Woolworths share price is a buy

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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A sizeable decline on Thursday was enough to send the S&P/ASX 200 Index (ASX: XJO) lower last week. The benchmark index tumbled 0.7% lower over the period to 5904.1 points.

While a large number of shares on the index dropped lower last week, some fell more than most. Here’s why these ASX 200 shares were the worst performers on the index:

The Mesoblast limited (ASX: MSB) share price was the worst performer on the index last week with a 19.8% decline. Interestingly, this was the biotech company’s first week on the ASX 200 after joining at the 22 June rebalance. Investors may have been taking profit after some very strong gains over the last few months.

The Corporate Travel Management Ltd (ASX: CTD) share price was out of form last week with an 18.9% decline. Investors were selling travel shares after a spike in coronavirus cases in Victoria sparked fears that the recovery in the domestic travel market might take longer. Also falling heavily were fellow travel bookers Flight Centre Travel Group Ltd (ASX: FLT) and Webjet Limited (ASX: WEB). They dropped 16.8% and 15.1%, respectively, last week.

The oOh!Media Ltd (ASX: OML) share price wasn’t far behind with a 14.9% decline. The outdoor advertising and media company’s shares have come under pressure this month after a disappointing trading update at its annual general meeting. That update revealed that many advertisers have been pushing back their campaigns to the second half of the year.

The Perenti Global Ltd (ASX: PRN) share price was a poor performer with a 14.3% decline. Investors were selling the mining services company’s shares after the release of a business update. Perenti advised that it expects FY 2020 underlying profit after tax to be $106 million to $110 million. This was a 4% to 8% reduction on its guidance that was withdrawn in March.

More reading

• Share price winners and losers of the pandemic
• In today’s market, should you buy ASX shares, buy gold, or hold cash?
• ASX 200 drops 2.5%, ASX travel shares dumped
• ASX 200 down 1.8%: CSL announces new acquisition, Qantas to raise $1.9bn
• Qantas share price on watch as it launches a $2bn cap raise

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Corporate Travel Management Limited and Webjet Ltd. The Motley Fool Australia has recommended Flight Centre Travel Group Limited and oOh!Media Ltd. 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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Australian manufacturing is not dead, but it’s fighting hard. If a company has a full-scale manufacturing plant in Australia then you can rest assured that they are incredibly efficient. If the market falls again then there are several good manufacturing shares to buy.

Shipbuilding pioneer

Austal Limited (ASX: ASB) is down by more than~13% since announcing on Monday that it had secured US$50 million in government funding. The funding is designed to maintain, protect, and expand US Domestic Production of steel shipbuilding over the next 24 months, beginning June 2020. This announcement underlines the value of Austal to the US defence forces and the importance to the shipbuilding industry there. 

I find Austal to be a wonderful company that executed a fantastic turnaround when David Singleton took over. His recent departure leaves the company in the capable hands of former Chief Operating Officer, Patrick Gregg. Alongside the government funding the company also recently won a $43 million contract modification for the Littoral Combat Ships (LCS).

Other recent announcements include raising of FY20 guidance for group revenue by $100 million and the award of a contract for $350 million to build 6 cape-class patrol boats in Australia.

Before many recent announcements, the company already had a forward order book of $4.3 billion. In my view, this company is very undervalued and provides investors with a good share at a great price. 

Australian packaging shares to buy

The Orora Ltd (ASX: ORA) share price has crashed by ~23% since the share went ex-dividend on 19 June. This points to the current practice of short-term dividend harvesting occurring to try to replace dividends that have been suspended. Nevertheless, it provides investors with a horizon of, say, 1 year, an opportunity to buy a cheap stake in a good company.

Over a 6 year period, the company has managed to grow its earnings per share (EPS) by an average of 24.9% a year. This has been largely due to continuing efficiency improvement as the company’s sales growth has been only about 6% per year. 

Not often discussed is the company’s performance in the US markets. Orora is one of the top 5 providers in the US$50 billion packaging sector. It also owns an advertising company, Orora Visual. This is in the top 4 of the US$10 billion points of purchase and displays segment. I think this is a great share to buy for medium-term capital growth.

Foolish takeaway

Every time the market moves as one there are almost always a lot of shares to buy. This is particularly true with manufacturing shares. While many investors are bedazzled by the performance among the buy now pay later and tech shares, there are very sound companies with a long track record that are on sale at dirt cheap prices. 

More reading

• Why Altium, Austal, Challenger, & Mesoblast shares are tumbling lower
• ASX Stock of the Day: Austal share price surges 9% on US Government agreement
• Why Austal, James Hardie, Northern Star, & Ramelius are storming higher
• ASX 200 flat: Altium update disappoints, Metcash posts full year loss
• A $73m boost sends the Austal share price to the top of the ASX 200 today

Daryl Mather owns shares of Austal Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Austal Limited. 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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Buying cheap stocks after the recent market crash may not seem all that appealing to many investors. After all, previous bear markets have often lasted for a prolonged period of time. With the potential for a second wave of coronavirus across many of the world’s major economies, stock prices could come under further pressure in the coming months.

However, the past performance of the stock market shows that it has always been able to recover from bear markets to post new record highs. Therefore, buying cheap stocks that have solid financial positions today could provide you with the greatest scope to benefit from a turnaround for equities over the long run.

Recovery potential

While a stock market rally and a return to previous highs may not seem all that likely in the short run, over the long term it seems probable. The stock market has a strong track record of recovering from challenges such as the global financial crisis, the tech bubble and many other difficulties that have caused investor sentiment to weaken and cheap stocks to become more widely available.

Certainly, coronavirus is an unprecedented event for investors to overcome. It is still too soon to know how significant its impact will be on a wide range of sectors and economies. But previous downturns and bear markets have spawned the same uncertainties among investors. Yet, sentiment has always proceeded to improve after even the most severe declines in stock prices.

Buying cheap stocks

Many investors aim to buy stocks when they are low, and sell them when they are high. One of the main difficulties in implementing this strategy is that for a stock to be cheap, there often must be a significant risk ahead that prompts weaker financial performance or declining investor sentiment.

At the present time, many of the risks facing the world economy appear to have been priced in to stock valuations by investors. Therefore, it is possible to buy high-quality businesses while they are trading on low valuations. This could provide you with a more attractive risk/reward opportunity, since buying any asset at a lower price can provide greater scope for capital growth.

Although there is a risk that cheap stocks will continue to fall in price, over the long run many valuations on offer across the stock market suggest that a wide margin of safety may already be on offer.

Financial strength

Of course, for cheap stocks to deliver on their long-term recovery potential, they must survive a challenging short-term outlook. Therefore, it is vital that investors select companies that have attributes such as modest debt levels, dominant market positions and the right strategies to reduce costs if required in the short run.

Through buying the most appealing businesses while they trade on low valuations, you could boost your portfolio’s long-term growth prospects and improve your financial circumstances in the coming years.

More reading

• How I would construct a $50,000 growth portfolio
• These were the best performing ASX 200 shares last week
• These were the worst performing ASX 200 shares last week
• Here are 2 dirt cheap manufacturing shares to buy next week
• 4 top ASX dividend shares you should never sell

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.

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