Cheap ASX shares can be a great way to beat the market if you’re able to find opportunities that other people haven’t identified.
Some growth shares like Afterpay Ltd (ASX: APT) are now priced so highly that it’s hard to see how much further they can rise.
Finding unloved gems could be how investors beat the market over the next six months (and the longer-term) at the current share prices.
Here are three examples:
Vitalharvest Freehold Trust (ASX: VTH)
This is one of the only agricultural real estate investment trusts (REITs) on the ASX. Currently, it owns four berry properties and three citrus properties. These are some of Australia’s biggest berry and citrus properties. All of the properties are leased Costa Group Holdings Ltd (ASX: CGC), a high-quality tenant.
The ‘cheap’ part of this ASX shares comes with the discount to the stated net asset value (NAV). At 31 December 2019 it had a net asset value (NAV) of $0.95 per unit. Assuming no change to the NAV – it may have grown since then – today’s share price is an 18% discount to the last NAV. That’s a big discount. Rural Funds Group (ASX: RFF) trades at a premium to its NAV.
I think the discount to the share price could close as investors learn of the growth plans of Primewest Group Ltd (ASX: PWG), which is the new investment manager. It plans to change the name to Primewest Agri-Chain Fund and invest in a wider group of different assets (not just farms) including processing and manufacturing facilities for food, food and beverage packaging facilities and storage facilities related to food.
The rebound of performance of Costa’s farms could also help as the worst of the drought seems to be over. At the current share price, Vitalharvest has a distribution yield of around 6% right now.
NAOS Small Cap Opportunities Company Ltd (ASX: NSC)
This is a listed investment company (LIC). It invests in small caps on the ASX and maintains a high-conviction portfolio of around 10 names.
LICs can give your portfolio targeted diversification. You don’t need to own every single share out there if you just own the more promising ones that do well over the long-term. At the moment it owns shares like MNF Group Ltd (ASX: MNF), Consolidated Operations Group Ltd (ASX: COG) and BSA Limited (ASX: BSA).
This ASX share is cheap because it’s trading at a very large discount to its net tangible assets (NTA). At the end of June 2020 it had a pre-tax NTA of $0.68 compared to today’s share price of $0.49 – that’s a discount of 28%.
I’m not sure what a fair discount for a LIC is, but a 28% discount is very high. High-conviction portfolios can underperform for a longer time period, but sometimes performance can revert back to the long-term average. If that happens then the NTA discount may close up.
At the current NAOS Small Cap Opportunities share price, it has a grossed-up dividend yield of 11.7%.
Tassal Group Limited (ASX: TGR)
The biggest fish business in Australia looks like a cheap ASX share to me.
Salmon and prawns are seen as healthier protein alternatives for consumers. The ASX share continues to diversify its farms geographically and its fish biomass is steadily growing. The company has three different growth avenues – domestic retail, domestic wholesale and export.
Tassal says that there is a rise in consumer demand for sustainable products that have open traceability, particularly products that are seen as quality Australian-made produce.
There is uncertainty in FY20 with COVID-19, but growth is expected to return in FY21. At the current Tassal share price it’s trading at 11x FY21’s estimated earnings. One estimate puts the FY21 grossed-up dividend yield at 7.5%, which is a good way to be rewarded for owning shares.
I think all three of these ASX shares look very cheap at today’s prices. I think Vitalharvest could be the bet most likely to go well because there are several reasons why its share price could rise over the next 12 months: the change in manager, acquisitions, a turnaround in variable rental profit and higher distributions.
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Motley Fool contributor Tristan Harrison owns shares of NAO SMLCAP FPO and RURALFUNDS STAPLED. The Motley Fool Australia owns shares of and has recommended COSTA GRP FPO, MNF Group Limited, and RURALFUNDS STAPLED. The Motley Fool Australia owns shares of AFTERPAY T 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.