Stock Market Recovery: Is It Too Late to Find Cheap Shares to Buy Right Now?

I think it is still possible to find cheap shares to buy even after the stock market recovery. However, diversification and a quality focus remain crucial.

edit Sale sign, value, discount

Image source: Getty Images

The stock market recovery after the 2020 market crash does not mean cheap shares are now extinct. In fact, many sectors continue to trade on low valuations as a result of their weak short-term outlooks.

This provides an opportunity for investors to buy stocks at low prices. In the long run, this can mean there is greater scope for capital growth.

However, it remains important to focus on the quality of companies as well as their price. Similarly, diversifying could be crucial in today’s uncertain economic environment.

Finding cheap shares to buy right now

It is still possible to build a diverse portfolio made up of cheap shares. The stock market recovery has, to some extent, been focused on companies and sectors that have upbeat financial forecasts for 2021, or that can easily adapt to major changes caused by coronavirus.

Therefore, sectors such as financial services, hospitality, travel and some retailers contain companies that trade at low prices. In some cases, their valuations are significantly lower than their long-term averages – even after the stock market recovery has lifted them from their lowest levels in the past 12 months. This could mean that they provide scope for capital growth, since company valuations have historically reverted to their long-term averages as a sustained stock market rally takes hold.

Similarly, cheap shares could become increasingly popular among investors. Their operating conditions are unlikely to be as weak as they have been in recent months over the long run. As such, their financial performances may improve versus their 2020 and even 2021 levels so that they can command higher share prices in the coming years.

Focusing on high-quality stocks

Of course, it remains important to manage risk when buying cheap shares. Sometimes, the lowest-priced companies can be the most unattractive businesses because of risks such as weak financial positions or a stale growth strategy.

Therefore, assessing the quality of a company prior to purchase could be a worthwhile move. It may enable an investor to avoid value traps, which are cheap stocks that are priced at low levels for good reason. Avoiding such companies can reduce the risk of loss within a portfolio and produce higher returns in the long run.

So, too, can diversifying among cheap shares. The weak economic outlook for the early part of 2021 and the potential for a volatile stock market mean that holding a wide range of companies is likely to be a sound move. Doing so will reduce an investor’s reliance on a small number of businesses for their returns.

A diverse portfolio could be especially useful given the likely imbalance in performance between different regions and industries in 2021, as some places and sectors are affected to a greater degree by coronavirus and political threats.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Investing

woman data analyze
Dividend Stocks

These U.S. Stocks Are No-Brainer Additions to Your Portfolio

Buy these two no-brainer U.S. stocks if you want to gain exposure to international stocks in your self-directed portfolio.

Read more »

Value for money
Dividend Stocks

1 Value Stock Every Canadian Investor Should Own

This value stock not only has a solid present, but a stable future at incredibly cheap and even oversold prices!

Read more »

consider the options
Tech Stocks

Top 2 Beaten-Down Stocks I’ve Not Given Up on

The massive correction in the prices of these TSX stocks presents a solid buying opportunity at current levels.

Read more »

sale discount best price
Dividend Stocks

Passive-Income Alert: 2 Great Canadian Dividend Stocks Trading at Cheap Prices

TFSA investors can now buy top TSX dividend stocks at discounted prices for a portfolio focused on passive income.

Read more »

Growing plant shoots on coins
Dividend Stocks

Long-Term Investing: 2 Top Dividend-Growth Stocks to Power Your Portfolio

While many growth stocks remain under pressure in this environment, here are two top dividend-growth stocks to buy now and…

Read more »

edit Safety First illustration
Dividend Stocks

2 of the Safest Dividend Stocks on Earth Right Now

Royal Bank of Canada (TSX:RY)(NYSE:RY) is one of the safest stocks on earth, historically speaking.

Read more »

retirees and finances
Bank Stocks

Why You Can’t Rely on the Common Sources of Retirement Income  

Future Canadian retirees can’t rely solely on the common sources of retirement income. However, there are ways to convert savings…

Read more »

TFSA and coins
Dividend Stocks

TFSA 101: How Retirees Can Earn $407.50 Per Month Tax Free for Decades

Retirees can buy top TSX dividend stocks at cheap prices right now for a TFSA focused on passive income.

Read more »