The sell-off that share markets have seen in 2022 could be a great time to go hunting for cheap ASX shares.
Some businesses aren't necessarily better value just because they fall 5% or 10%. The prospects for short-term profitability could have noticeably reduced.
But, when a share price has declined by 30%, 50% or even more, I think it's worth considering whether that is an opportunity for investors.
A share price is meant to represent the long-term value of a business, not just what happens in the next three or 12 months. Depending on the business, I think it's unlikely that the long-term value of the company has reduced by that much.
As a bonus, if we can find businesses that could pay sizeable dividends, the low price-to-earnings (p/e) ratio could mean that investors are rewarded in the short term. I don't believe that economic conditions will always look this uncertain.
However, I think it's worth saying that investors should try to avoid businesses with dangerous amounts of debt.
When a business falls in value, it means that a recovery can be stronger in percentage terms for new investors. What I mean by that is, for example, if a company falls by 50% then a recovery back to its former price would be a rise of 100%. It's hard to know which ones will recover significantly without a crystal ball. But, looking at their business plans can help.
These are some of the examples that I'd look at.
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Adairs Ltd (ASX: ADH)
Adairs is a business that sells homewares and furniture.
First, let's look at how cheap it may be and the expected dividend. The Adairs share price has fallen by 45% this year. According to Commsec, Adairs is now valued at 8x FY23's estimated earnings. The FY23 grossed-up dividend yield could be 11.6%. I think those two statistics make it a cheap ASX share.
While it's quite possible that households are going to reduce their discretionary spending on some items that Adairs sells, I think it can continue to generate good enough profits to keep the dividends flowing to shareholders during this period.
I like the company's plans to upsize some stores to the more profitable larger format. The focus on improving efficiencies, growing its store network, and working on e-commerce sales also seems smart.
Accent Group Ltd (ASX: AX1)
Let's again start by having a look at how much damage has been done this year. The Accent share price has dropped by 37% since the start of 2022. Not as much as Adairs, but still a hefty drop.
Accent is a business that sells a wide variety of shoe brands. Some brands it owns, whereas others it is the distributor for. While shoes aren't exactly the most defensive industry, we do all need shoes, so I think there will still be enough demand for the company to stay profitable and keep paying good dividends.
According to Commsec, the Accent share price is valued at 13x FY23's estimated earnings with a potential grossed-up dividend yield of 8.7%. I think these numbers make Accent a cheap ASX share.
But, even though the economy is going through a bit of a rough time, I like that the business is laying the groundwork for the next phase of growth.
Like Adairs, it is also trying to grow its online sales and improve its profit margins. But, the key part of the plan that I like the most about Accent is that it is opening dozens of new stores. This enables Accent to benefit from growing scale. It also means that FY23 will see a full year's sales contribution from stores opened in FY22, and that stores opened in FY23 can partly contribute to the year, as well as boost the sales and earnings next year.
