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The Coventry Group Ltd (ASX:CYG) share price is up 9.59%% at the time of writing to 80 cents. This came after the company released a quarterly update for the September quarter. 

What was in the announcement?

Coventry Group announced sales growth of 7.7% in the September quarter 2020 when compared to the September quarter 2019. Total sales for the period were $68.3 million. 

The company reported that sales of its fluid systems were up 12.7% in Q1 FY2021 when compared to Q1 FY2020. According to the company, this was due to its strong value proposition along with activity in key market sectors and diversification into new markets. Coventry Group received a large order for its fluid systems in September of $8 million from a major mining and resources client. The company expects this large order to have a positive effect on its half year results.

According to Coventry Group, sales from its trade distribution business were up 4.8% in the September quarter of 2020 when compared to the prior corresponding period. The company reported that all business units in trade distribution posted a positive contribution to results for the September 2020 quarter.

According to the company, COVID-19 has had a minimal impact on its business, with the exception of lock downs in New Zealand. Coventry Group reported that all business units are fully operational, apart from four Konnect branches in metropolitan Melbourne which are affected by lockdowns and have some customer constraints in store.

Coventry Group reported that it had net assets of $104.1 million at 30 September and is targeting completion of the acquisition of industrial hose and associated equipment supplier, HIS Hose, on 1 December 2020.

The company advised that the markets in which its fluid systems and trade distribution businesses operate have been reasonably resilient during the COVID-19 pandemic. Furthermore, it expects its businesses to benefit from additional government stimulus measures and for economic growth to rebound.

About the Coventry Group share price

Coventry Group is a supplier of industrial products to the mining, construction and manufacturing sectors. It has been listed on the ASX since 1966.

The Coventry Group share price is up 73.91% since its 52-week low of 46 cents, however, it has fallen 24.53% since the beginning of the year. The Coventry Group share price is down 26.61% since this time last year.

More reading

• Why Afterpay’s (ASX:APT) Nick Molnar is embracing the fashion world
• Meet the ASX stock that could pay its first dividend in 8 years
• Looking for the next big thing? Check out these exciting ASX tech shares
• Alterity (ASX:ATH) share price lower on completed placement
• Brokers name 3 ASX shares to buy right now

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The Emeco Holdings Limited (ASX: EHL) share price surrendered its morning gains even though it could pay its first dividend in eight years.

The EHL share price dipped 0.6% to 80 cents during lunch time trade after jumping by nearly 4% at the open.

In contrast, the S&P/ASX 200 Index (Index:^AXJO) was trading 0.2% lower as mining and real estate stocks slumped.

Best balance sheet since IPO

Investors had initially taken a shine to Emeco after the heavy machinery rental group after it redeemed its US$142 million ($195 million) March 2022 notes.

The repayment of the debt enables management to extend the maturity of its $97 million revolving credit facility to September 2023.

Management now has $153 million in accessible cash following last month’s capital raising.

Emeco could restart paying a dividend

Emeco is now claiming its balance sheet is the strongest it’s ever been since it floated on the ASX in 2006.

It’s proforma net debt of $224 million gives it a net leverage of 0.9 times, while its pro forma interest coverage stands at 9.8 times.

More significantly for investors, Emeco could be about to restart paying a dividend – something it’s stopped doing since early 2013! This assumes it doesn’t use the cash to make a sizable acquisition.  

Good outlook for cash flow

“With longer tenor on significantly reduced total debt and lower interest expense, we are set to generate strong free cash flow in the years ahead,” said Emeco’s chief executive Ian Testrow.

“This allows the Emeco team to fully focus on running the business and continue our evolution to becoming a leading mining services solutions provider.

“We are excited to now be in a position to have the flexibility to implement a complete capital allocation framework, including distributions to shareholders in the future, as appropriate.”

Foolish takeaway

News that China is curtailing Australian coal and the global transition towards decarbonisation could impact on Emeco’s business.

But I believe the stock is oversold. Emeco can offset the loss by picking up work from other mineral miners, including gold producers.

In fact, the group announced yesterday that it won an open pit mining contract for Red 5 Limited’s (ASX:RED) Great Western Project, south of the Darlot Gold Mine, commencing in January 2021.

Given the near record high gold price and the bullish outlook for the precious metal, demand for Emeco’s services should stay robust through next year, if not beyond.

The stock looks cheap and this weakness is a buying opportunity.

More reading

• Why Afterpay’s (ASX:APT) Nick Molnar is embracing the fashion world
• There’s good news and bad for these ASX commodity shares
• Why the New Hope Corporation (ASX:NHC) share price is down
• Why Dubber, New Hope, Pro Medicus, & Rio Tinto shares are dropping lower
• The Medibank (ASX:MPL) share price rockets on broker upgrade

Motley Fool contributor Brendon Lau owns shares of Emeco Holdings 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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If you’re looking for the next Appen Limited (ASX: APX) or Xero Limited (ASX: XRO), then I think you might want to check out the small cap tech shares listed below.

I believe these three companies have the potential to grow materially over the 2020s. If this happens, it could lead to their shares generating very strong returns over the next decade.

Here’s why I think they should at least be on your watchlist:

Bigtincan Holdings Ltd (ASX: BTH)

Bigtincan is a $495 million provider of enterprise mobility software. The company’s software allows sales and service organisations to increase their sales win rates, reduce expenditures, and improve customer satisfaction. It achieves this by pairing functionality with a highly-intuitive user interface that provides an advanced content management system, document automation, internal communications, and fully integrated modern LMS. Demand for its platform has been growing at a very strong rate and has attracted a number of blue chip customers. The good news is that it still has a long runway for growth. Management estimates that the sales engagement platform will be worth $6 billion a year by 2021.

ELMO Software Ltd (ASX: ELO)

ELMO is a $520 million cloud-based human resources and payroll software company. It streamlines processes such as employee administration, recruitment, on-boarding, remuneration, and payroll through a single a unified platform. At present the company is operating in both the ANZ and UK markets. Though, given how its platform is jurisdiction agnostic, expansions into other regions seems likely in the future. For now, though, the company estimates that it has a $2.4 billion opportunity in the ANZ market and a $6.8 billion opportunity in the UK market. Its footprint in the latter market has just been boosted with the acquisition of UK-based Breathe.

Whispir (ASX: WSP)

Finally, Whispir is a $425 million software-as-a-service communications workflow platform provider. Its industry-leading software platform allows businesses and governments to deliver actionable two-way interactions at scale using automated multi-channel communication workflows. A great example of its use was during the height of the pandemic when it was used by 22 government departments for COVID-19 communications. It was used for secure, interactive two-way messages and real-time updates to sufferers and those who have been in the close contact with someone with COVID-19. Management estimates that the Workflow Communications platform as a Service market could reach US$8 billion per year by 2024.

More reading

• 3 exciting ASX growth shares to buy for stellar long term returns
• Bigtincan (ASX:BTH) share price edges higher following acquisition
• Top ASX tech shares to buy in October 2020
• Top brokers name 3 ASX shares to buy next week
• Why Downer, ELMO, Netwealth, & Sezzle shares are storming higher today

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 BIGTINCAN FPO, Elmo Software, and Whispir Ltd. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Xero. The Motley Fool Australia owns shares of Appen Ltd. The Motley Fool Australia has recommended BIGTINCAN FPO, Elmo Software, and Whispir 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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The Alterity Therapeutics Ltd (ASX: ATH) share price has been falling today following the release of a completed capital raise announcement. In early morning trade, the biotech’s shares were pushing higher but have since pulled back. At the time of writing, the Alterity share price is down 2% to 4.9 cents.

Let’s take a further look at Alterity and what it announced.

What does Alterity do?

Alterity is an Australian biotech company that focuses on commercialising research into neurodegenerative disorders. These include Parkinsonian movement disorders, Alzheimer’s disease, Huntington disease and others.

The company’s lead candidate, ATH434, is currently in development. It aims to block the aggregation of pathological proteins that cause brain degeneration. Current remedies include medications and lifestyle choices to the manage symptoms, but there is no treatment to cure the disease.

Completed placement

Alterity advised it has received binding commitment for a capital raising of $35 million. The placement will be via two tranches to top tier institutional investors in Australia and North America. In addition, new institutional and sophisticated investors from Australia, the United Kingdom and North America will take part.

The fully subscribed capital raise was conducted at an offer price of 3.7 cents. This represented a 25.7% discount on the 30-day volume weighted average price prior to the trading halt. The company said that for every share allocated in tranche two of the placement, one option will be issued.

The option will have an exercise price of 7 cents and an expiry date of three years post allotment.

The first tranche is expected to raise approximately $10 million under the current placement capacity. The second tranche is valued at $25 million, subject to shareholder approval planned on 18 November at the company’s AGM.

The new shares to be issued will rank equally with the existing fully paid Alterity ordinary shares.

Where are the funds going to?

The proceeds of the placement will used to progress Alterity’s clinical development program for ATH434. This will include a natural history study and a phase II trial targeting multiple system atrophy patients.

Furthermore, ongoing research and discovery, as well as working capital, will be allocated a portion of these funds.

Management commentary

Alterity Chair and CEO, Mr Geoffrey Kempler commented on positive feedback to fund ATH434. He said:

We are thrilled with the response of global investors in supporting Alterity to advance our lead compound ATH434 for the treatment of MSA to later stage patient trials.

We believe that our science is unique, validated, and is capturing the attention of physicians and researchers for its potential to have a positive impact on the lives of many people suffering from Parkinsonian diseases which currently have no cure.

More reading

• Brokers name 3 ASX shares to buy right now
• Aussie Broadband (ASX:ABB) share price rockets 122% following IPO
• There’s good news and bad for these ASX commodity shares
• Why the Dubber (ASX:DUB) share price is tumbling lower today
• Why the New Hope Corporation (ASX:NHC) share price is down

Motley Fool contributor Aaron Teboneras 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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Australia’s top brokers have been busy adjusting their estimates and recommendations again, leading to the release of a large number of broker notes this week.

Three broker buy ratings that have caught my eye are summarised below. Here’s why brokers think these ASX shares are in the buy zone:

Audinate Group Ltd (ASX: AD8)

According to a note out of UBS, its analysts have retained their buy rating and lifted their price target on this digital audio-visual networking technologies provider’s shares to $8.00. This follows the release of a better than expected first quarter update. It was impressed with its performance in a tough environment and notes that sales are back to pre-COVID levels. It appears optimistic that this positive form will continue throughout FY 2021 and Audinate will achieve its forecasts. I agree with UBS and feel that Audinate could be a great long term option.

IDP Education Ltd (ASX: IEL)

A note out of Morgan Stanley reveals that its analysts have retained their overweight rating and $24.00 price target on this student placement and language testing company’s shares. The broker notes that its largest shareholder, Education Australia, is considering a further sell-down of its holding to provide financial support its own shareholders – 38 universities. Morgan Stanley doesn’t expect a sell-down to have any real impact on the company’s relationships with these universities. In light of this, it appears to see the recent share price weakness as a buying opportunity. I would have to agree with the broker on this one.

Redbubble Ltd (ASX: RBL)

Analysts at Goldman Sachs have retained their buy rating and lifted the price target on this ecommerce company’s shares to $6.25. This follows the release of a first quarter update which revealed a 116% increase in revenue and material gross margin improvements. Goldman was also pleased to see that this growth was not driven purely by face mask sales. In fact, face mask revenue fell from 27% of revenue in July to 14% of revenue in September. This has given the broker greater confidence that its strong form can be maintained and led to Goldman increasing its earnings forecasts. I agree and feel Redbubble could be worth a closer look.

More reading

• The Medibank (ASX:MPL) share price rockets on broker upgrade
• Why Beacon Lighting, Medibank, Redbubble, & Tyro shares are racing higher today
• How this fund manager’s 60% UP in the year of COVID-19
• Should you stay invested in an ASX share after a strong run?
• ASX 200 rises, Pro Medicus (ASX:PME) wins another global contract

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 AUDINATEGL FPO and Idp Education Pty Ltd. The Motley Fool Australia has recommended AUDINATEGL 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 Aussie Broadband Limited (ASX: ABB) share price has had a fantastic first day on the ASX boards.

Earlier today the internet provider’s shares were up a massive 122% from its IPO listing price of $1.00 to $2.22.

The Aussie Broadband share price has dropped back a touch since then but is still up 90% to $1.90 at the time of writing.

Aussie Broadband IPO

This morning Aussie Broadband listed on the Australian share market after raising approximately $40 million through a partially underwritten initial public offering of ~40.45 million at $1.00 per share.

The funds raised by Aussie Broadband are going to be used predominantly on the deployment of a dark fibre network. This project is due to be completed within two years and have a minimum useful life of 25 years. Management expects it to improve the company’s ability to provide redundancy and increase capacity to meet market demand.

According to the release, the IPO was strongly oversubscribed, being supported by existing institutional investors, new institutional investors, and clients of the lead manager, Shaw and Partners.

Combined with the shares held by existing shareholders and noteholders, this gave Aussie Broadband a market capitalisation of $190.5 million.

Though, given its strong gain today, Aussie Broadband’s market capitalisation is now just over $360 million.

What is Aussie Broadband?

Aussie Broadband is an Australian owned and operated telecommunications company competing with Telstra Corporation Ltd (ASX: TLS) and TPG Telecom Ltd (ASX: TPG).

It provides nbn subscription plans and bundles to residential homes, small businesses, not-for-profits, corporate/enterprise, and managed service providers. It also offers a range of other telecommunications services including VOIP, mobile plans, and entertainment bundles through its partnership with Fetch TV.

At the last count, the company had over 300,000 residential, small business, and enterprise customers.

In FY 2020 it generated total revenue of $190.49 million, a 91% increase year-on-year from revenue of $99.65 million in FY 2019.

Management commentary.

Phillip Britt, Managing Director of Aussie Broadband, commented: “Our business has grown strongly over the past three years due to our reputation for providing high-quality internet at home, business and enterprise levels, along with our transparent customer service to ensure our customers have a seamless end to end experience.”

“Our investors are telling us they want to become part of a business that is operating with incredibly strong ethics and values, that is contributing in unique ways to the Australian community and economy, that has a heart and treats its people well. They want to be part of the Aussie Broadband story, as well as see their capital grow with us,” he added.

More reading

• 2 safe ASX shares for your retirement portfolio
• Top brokers name 3 ASX shares to buy today
• Could this small cap ASX telco become the next Telstra (ASX:TLS) share price? 
• Why it’s always a good time to buy blue chip ASX shares
• Is the Telstra (ASX:TLS) share price a buy for 2021?

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. 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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There’s good news and bad news afoot for ASX commodity investors owning shares or looking to add to their shareholdings.

First, the bad news.

Coal, Australia’s second largest export earner after iron ore, is coming under renewed pressure.

As you may know, there are two types of coal, thermal – burned in power plants to generate electricity – and coking, which has a higher energy content and is primarily used to make steel. Australia has an abundance of both.

Thermal coal has long been under pressure from environmental groups for its carbon emissions and other pollutants. Some nations, like India and China, are still rolling out new coal fired power plants. But the longer-term outlook sees the demand for thermal coal steadily declining as it’s replaced by renewables and electricity generated from cleaner burning LNG.

Coking, or metallurgical coal, is likely to remain in demand for the foreseeable future.

Although Japan remains Australia’s biggest market for coal, China’s continuing infrastructure and building boom demands a lot of new steel. That in turn requires iron ore and, generally, coking coal.

And herein lies the bad news for ASX coal shares.

The Middle Kingdom strikes back

Political ructions between the Chinese and Australian governments have already seen China lash out economically, hitting both Australian wine and barley producers.

In its latest move, which the Chinese Government remains mum on, Australian coal exports are being deferred by Chinese buyers. Inauspiciously, it appears other coal exporting nations are unaffected.

According to the Australian Financial Review:

Australia’s biggest coking coal exporter, BHP, said on Wednesday that Chinese customers had asked for coal shipments to be deferred, in the first public confirmation that Chinese policy was hitting Australian miners…

Senior figures in the global coal industry are increasingly convinced that political tensions between Australia and China are behind the deferrals, amid signs that shipments from other exporting nations have been able to enter China.

While BHP Group Ltd (ASX: BHP) is Australia’s largest coking coal exporter into China, it’s the ASX shares that derive most – or all – of their income from coal that could suffer the most if China keeps its ports shuttered to Australian imports.

Even companies like Whitehaven Coal Ltd (ASX: WHC), which earned less than 2% of its revenue from Chinese buyers last year, will come under increased pressure if coal prices continue to fall. Coking coal prices are already down 10% since 6 October.

The Whitehaven share price is only down 2% since 6 October. But it’s been a rough year for the miner, with its share price down 59% so far in 2020.

The declining price of coal and potential import bans from China couldn’t come at a worse time for Queensland coal miner, New Hope Corporation Limited (ASX: NHC). New Hope just announced it is laying off as much as 75% of its workforce as it struggles to gain the required approvals for its New Acland mine.

At the time of writing, the New Hope share price is down 42% year to date.

After steep falls like this, you may be tempted to believe these coal shares are at or near their bottom. And while that may be true, I believe investing in these shares today would be more akin to catching a falling knife than buying at a comfortable dip.

So, what was that about good news?

Food prices up amid booming Aussie harvest forecasts

Australia not only has an abundance of coal, it also has a huge agricultural footprint with plenty of growth potential ahead.

Last month, the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) released its latest updated crop report. It revealed huge expected growth among much of Australia’s winter crop production, with wheat up 22% from its 10-year average and barley up 23%.

Moreover, noting the favourable weather conditions, ABARES forecasts a 194% increase in Australia’s summer crop output.

The International Monetary Fund (IMF) added its own bit of good news for ASX agricultural shares with its projection that food prices will rise 0.4% this year. That may not sound like much, but remember the world is largely in a deflationary period right now, with the price of most goods flat or falling.

One ASX share that’s well placed to benefit from a bigger harvest and higher prices is Graincorp Ltd (ASX: GNC). Much of GrainCorp’s revenues are derived from storing and transporting grains.

The Graincorp share price is up 11% year to date, at the time of writing. By comparison, the All Ordinaries Index (ASX: XAO) is down 7% in 2020.

Another ASX share that I believe has a lot of potential for growth in the current environment is Costa Group Holdings Ltd (ASX: CGC). Costa Group is Australia’s largest grower, packer and marketer of fresh fruit and vegetables.

The Costa share price is up 49% year to date.

More reading

• Why the New Hope Corporation (ASX:NHC) share price is down
• Why Dubber, New Hope, Pro Medicus, & Rio Tinto shares are dropping lower
• ASX 200 rises, Pro Medicus (ASX:PME) wins another global contract
• Why the BHP (ASX:BHP) share price is up on AGM news
• Countries are panic buying food and this isn’t reflected in ASX agriculture stocks

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended COSTA GRP 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 Dubber Corp Ltd (ASX: DUB) share price has returned from its trading halt and is tumbling lower on Friday.

In afternoon trade the cloud-based call recording services provider’s shares are down 5.5% to $1.18.

Why was the Dubber share price in a trading halt?

Dubber requested a trading halt on Wednesday so it could launch an institutional placement.

This morning the company revealed that it received firm commitments from institutional, professional, and sophisticated investors to raise $35 million at $1.10 per share. This represents a 12% discount to its last close price.

Dubber will now look to raise a further $6 million via a share purchase plan at the same price. This offer is scheduled to close on Friday 6 November 2020.

Why is Dubber raising funds?

Dubber revealed that the proceeds from its capital raising will be used to accelerate its global growth, support product development, pursue strategic merger and acquisition opportunities, and for general working capital.

The company’s CEO, Steve McGovern, was very pleased with the success of the placement and appears confident that the funds will help accelerate Dubber’s growth.

He commented: “Dubber has a leadership position globally as the unified call recording platform of choice for service and unified communications solutions providers. We will meet accelerating demand globally with the expansion of our sales, marketing and product development efforts – and pursue M&A opportunities that are in the market.”

“Unified Call Recording is crucial to Enterprises meeting compliance requirements, boosting sales and CX performance; and, unlocking the potential in voice data. Dubber is the only solution capable of doing this globally, from within the network, eliminating the needs for complex hardware, software and services,” he added.

Mr McGovern concluded: “We are delighted with the support shown from investors, with bids received well in excess of amounts raised under the Placement.”

More reading

• Why Dubber, New Hope, Pro Medicus, & Rio Tinto shares are dropping lower
• Why the Dubber (ASX:DUB) share price rocketed 16% higher today

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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The New Hope Corporation Limited (ASX: NHC) share price is falling today, down 2.45% at the time of writing to $1.20. This comes after the company announced a restructure of its corporate office.

What was in the announcement?

New Hope Corporation advised it had offered voluntary redundancies to workers at its corporate office. The coal and oil producer plans to make 75% of its corporate office staff redundant by the end of November 2020. The restructure will see the majority of executive positions removed.

The company will adopt what it refers to as a more ‘streamlined’ management structure. 

New Hope Corporation CEO Reinhold Schmidt said with ongoing uncertainty around approvals for the New Acland coal mine, management has had “to refocus and put the business in the best position to go forward”.

We have had to make some very difficult decisions but, in reality, even if we were granted approvals for stage 3 today, we are in for a tough couple of years as we ramp up again.

About the New Hope Corporation share price

New Hope is a coal and oil producer with assets in Australia. The company has been listed on the ASX since 2003. 

In the year to 30 June 2020, New Hope had revenue of $1.08 billion, down 17% compared to the year to 30 June 2019. Earnings before interest, tax, depreciation and amortisation (EBITDA) were $290 million in FY2020, down 44% from FY19. Earnings per share (EPS) before non regular items were 10 cents.

The New Hope share price is up 17.65% since its 52-week low of $1.02, however, it is down 42.03% since the beginning of the year. The New Hope Corporation share price is down 47.60% since this time last year.

More reading

• Why Dubber, New Hope, Pro Medicus, & Rio Tinto shares are dropping lower
• New Chinese government threat leaves these ASX mining stocks on tenterhooks
• Why you may not need ASX REITs for dividends
• Top brokers name 3 ASX shares to sell next week
• Is the Soul Patts (ASX:SOL) share price a buy?

Motley Fool contributor Chris Chitty 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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The prospects for many cheap shares continue to be relatively uncertain. The coronavirus pandemic has continued over recent months, and may persist over the short run.

While this may mean that investors experience paper losses in the coming months, buying undervalued shares now could be a shrewd move.

Their low prices, track record of recovery and the presence of major stimulus packages may boost their returns in a post-pandemic world.

Buying cheap shares today

The ongoing threat of a second share market crash means that there are many cheap shares available to buy today. Investor risk aversion has continued to be relatively high of late, with many sectors facing a continued period of weak sales and profit growth.

Buying such companies now may be viewed as a risky move by some investors. And, while there is scope for paper losses in the short run, their long-term prospects appear to be bright. Low share prices mean that a wide margin of safety may be included in their valuation. This may provide greater scope for capital growth, which could catalyse your portfolio in the long run.

Furthermore, many cheap shares are undervalued because of weak investor sentiment towards the wider equity market. Therefore, some high-quality businesses may be trading on unjustly low valuations that do not reflect their future potential. They may offer scope for high capital returns as the economy recovers.

Track record of recovery

Even though cheap shares may deliver disappointing performances in the short run, their long-term prospects appear to be sound. The share market has a strong track record of recovering from even its very worst downturns to post new record highs. Therefore, investors who purchase shares when they are trading at a low ebb can benefit from its turnaround prospects.

For example, indexes such as the FTSE 100 Index (INDEXFTSE: UKX) and S&P 500 Index (INDEXSP: .INX) have experienced numerous bear markets over recent decades. They include the dot com crash, the global financial crisis and the 2020 market crash. They have still been able to produce high single-digit annualised returns that appear to be very achievable over the coming years.

Stimulus packages

Another reason why cheap shares can surge in the next decade is the stimulus packages being implemented in major economies across the world. Policymakers across North America, Europe and many other parts of the world are seeking to support the economy through a variety of measures, including low interest rates and asset purchase programmes.

Such programs have a solid track record of stimulating asset prices, as was evidenced in the decade-long bull market that followed the global financial crisis. Therefore, even if the economic outlook is tough at the present time, buying undervalued shares today could be a means of benefitting from favourable policy action over the long run.

More reading

• Why the New Hope Corporation (ASX:NHC) share price is down
• Why Dubber, New Hope, Pro Medicus, & Rio Tinto shares are dropping lower
• How the US election and COVID-19 vaccine will hit ASX shares
• The Recce (ASX:RCE) share price has surged up today. Here’s why
• Zip (ASX:Z1P) share price slumps 10% this week: is it a buying opportunity? 

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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