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Value hounds dig deep to uncover these cheap stocks

You better believe it, Foolish readers.

The bull market is back… fuelled by low interest rates, a recovering global economy, and Chinese growth.

Yesterday the ASX posted its biggest rise in three months, the S&P/ASX 200 jumping 55 points to close at 5,480.

As well as following the strong lead from Wall Street, the market was boosted by better than expected data coming out of China, the HSBC Flash China Manufacturing Purchasing Managers Index (aka PMI) jumping to a five-month high.

So much for all that scare-mongering about China, huh?

Xu Gao, chief economist with Everbright Securities Co in Beijing, who formerly worked for the World Bank, was quoted in the AFR as saying

“China’s urbanisation process is far from being over. The housing market… can be brought back to life when policies become appropriate.”

Only in China… but given Australia is a huge beneficiary of Chinese growth, who’s complaining?

Another rise on Wall Street overnight saw the ASX today jump back through 5,500, a level not seen since last month.

Last month… that’s all?

Yes, Foolish readers. May has felt like a tough old month, but reality is somewhat different. Yes, the ASX has been flat over the past month, but that hardly constitutes an investing disaster.

There’s nothing wrong with a flat month, mind you. It’s just when we’ve come off two years of markets going nowhere but up, it feels worse than it really is.

Throw in the budget from hell, winking politicians, partisan press, the massive knock in consumer confidence, and real wages growth falling below inflation, its lowest for 17 years, and I’m not surprised you’re feeling flat.

But that could be all about to change… starting with the ASX’s jump back to 5,500.

The positive data coming out of China bodes well for our miners, especially for our beleaguered iron ore companies.

And when you dig a little deeper, past the big banks and retailers, including Woolworths (ASX: WOW) and Wesfarmers (ASX: WES), there’s even more value to be found.

One example is the stock I bought this time last week — it has fallen 15% in the last month, for no apparent reason, such that it now trades on a very juicy fully franked dividend yield of 5.7%.

Also cheap, although not as obviously so, are some cyclical stocks.

As reported in The Age, the strategy team at Deutsche Bank recently said the buildings materials and steel sectors have high P/E ratios, but strong earnings growth, giving them low PEG (P/E to growth) ratios, making the sectors look cheap.

Deutsche Bank is similarly attracted to the earnings momentum of cyclical stocks, naming James Hardie Industries (ASX: JHX) and Sims Metal Management (ASX: SGM) amongst a group of stocks they thought offer decent earnings momentum.

These days James Hardie is leveraged to the US, with 80% of its revenue coming from that region, the remaining 20% from Asia-Pacific.

Yesterday the company reported a doubling of full year profits, a second half dividend up 54%, and a special dividend of 20 cents. Perhaps not surprisingly the AFR headline reads…

“Stars are aligning for James Hardie”

They’ve certainly aligned for shareholders over the past year, the stock rising an impressive 35%.

Sims Metal Management is similarly leveraged to US markets, around two thirds of its revenue derived from the North American segment. The $2 billion market cap company flies somewhat under the radar here in Australia, despite it being the world’s largest listed metal recycling company.

A quick look at earnings forecasts shows Sims trading on a forward P/E of 9 and a forward dividend yield of 5.1%.

Like Scott Phillips brand new ASX pick, a lot of growth is baked into the Sims Metal valuation.

Yes, it’s a risk. But get it right, and the profits from what look like ordinary stocks could turn out to be extraordinary.

I couldn’t close without one final quote, this one coming from David Young of Anfield Capital Management who was quoted on Bloomberg as saying

“We absolutely, positively must factor in the vast amount of liquidity looking for an interesting home. As a result, ‘sell in May and go away’ has been proven wrong, because where else are you going to go?”

Where else but the share market, of course?

A value price tag + growth + big dividends!

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The Motley Fool's disclosure policy is accountable. Of the companies mentioned above, Bruce Jackson has an interest in Woolworths and Wesfarmers.

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