Buy cheap stocks now? I just saw such an ad. Let’s not focus so much on the content, but generally consider whether it makes sense or not.
For me it’s a definite yes. Or: a yes and a no. Depending on how you define cheap stocks, one way or the other might be better. In any case, it is clear that it should not be measured solely on the basis of fundamental key figures. But let’s get into the subject a little more intensively.
Buy cheap stocks now: not like this!
Perhaps we’ll start with a stark warning: buying cheap stocks now is unwise given the stocks that have lost the most. There may still be potential here as well. Especially in the growth segment. Or some value stocks. Nevertheless, those candidates that appear cheap in terms of price-to-sales or price-to-earnings, even with a high yield, are not necessarily the most attractive candidates.
In fact, there are risks associated with buying fundamentally cheap stocks. There are usually reasons why a company trades well below annual sales. Or even if a yield is in the higher single digit percentage range, maybe even in the double digit percentage range. Then the investors should go in search of what problems there are. Or: How much value is still available. The balance is a first possible address. But also a business model that may simply no longer be in demand.
In that regard, cheap stocks are a double-edged sword when it comes to a clear focus on cheap valuations. However, there is another perspective that can be smart.
General: Cheap is not unwise
Still, it is not unwise to buy cheap or cheap stocks. By that I mean, above all, that you concentrate on the market phases with a high effort, when things are not going so well financially or psychologically. Corrections and crashes are good breeding ground for long-term solid returns.
Not all stocks need to have a price-to-earnings ratio in the single digits. Sometimes there is also quality at a discount, a timeless business model and solid growth just for more favorable terms. With dividend stocks, for example, rising interest rates mean that there is a higher dividend yield without necessarily greater risk in some cases.
Here it is smart to buy cheap shares. However, I would generally avoid investing in really cheap junk stocks. The return potential there is often not as solid as it appears at first glance.
Our top stock for 2022
There’s one company whose name is getting a lot of buzz from analysts at The Motley Fool these days. It’s for us THE best investment for 2022.
You could also benefit from that. To do this, you must first know everything about this unique company. So now we have one free special report prepared which introduces this company in detail.