Avoid these cheap stocks that are ready to trap investors

According to Alessandro Dicorrado, of the Ninety One UK Special Situations fund, although DIY investors had the opportunity to make big gains on cheap stocks, many were on the verge of falling.

asos is one,” he said. “That’s not to say it’s worth zero, but it has less of a competitive edge than we thought. There are so many multi-brand e-tailers doing their own shipping, but the profit margins are very low. Plus, there’s more competition from China.Asos shares have fallen 63% in the past year.

Alex Wright of Fidelity Special Situations, a value fund, warned that miners such as Rio Tinto, Anglo-American and Antofagasta were traps.

“Most value fund managers own mining stocks because they look so cheap on a price-earnings basis,” he said, pointing to a metric that shows a stock’s price relative to to its benefits. “But their incomes are very high because metal prices are, which won’t last forever. Earnings will fall in 2022. This will eventually hurt returns across the UK market as miners have such a big influence on the FTSE index. While these stocks look cheap at the moment, we don’t like the underlying investment case. »

However, Mr. Dicorrado said homebuilders were cheap stocks poised to grow, such as Taylor Wimpey. “Builders used to have a lot of debt that was eating into their cash flow, but now they have much healthier balance sheets and more flexible regulations – they’re good companies that aren’t expensive.”

Retailer Marks and Spencer was Mr. Wright’s wager. Shares had recovered 37% in the past year but are still 39% below where they were five years ago. It is also cheaper than its rivals on a price-earnings basis.

“The new executives have improved its clothing business,” he said. “It has also increased significantly because competitors such as Debenhams have fallen during the pandemic. But the food sector is the main driver because the market share is so low. The growth potential is significant. »

Mr Wright also pointed to Kingfisher, which owns a DIY retailer B&Q. “The new boss stopped a disastrous program in which the company was trying to produce own-brand products,” he said. “He had to deal with high inflation in the product line, but he was able to pass it on to his customers, which proves his strong pricing power.”

Derek Stuart, of the Artemis UK Special Situations fund, said some of London’s biggest companies were attractive opportunities, despite the number of pitfalls, such as the oil giant BP.

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