How I'm aiming to find under-the-radar cheap ASX shares right now

The ASX has thrown up a number of intriguing opportunities.

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Key points

  • Sometimes the share market can become a bit too short-term focused, which opens up opportunities
  • Retailers and tech company valuations could bounce back within three years
  • Certain parts of the real estate sector could also be opportunities, namely fund managers and industrial REITs

There are always opportunities to be found on the ASX share market. Some might get a lot of attention, such as when large ASX mining shares go through a cyclical dip like BHP Group Ltd (ASX: BHP) did in late October 2022. There are probably some under-the-radar, cheap ASX share opportunities.

A bit of weekly volatility is normal on the ASX, but large falls over an extended period of time could signal a chance for investors to buy.

Near the end of last year was a great opportunity to buy large technology businesses in the US and Australia. There has been a big recovery since then, with the Betashares Nasdaq 100 ETF (ASX: NDQ) up 37% in the year to date.

Why I think there are opportunities

The share market is made up of a huge number of different investors. Collectively, the investment world can sometimes become far too optimistic about businesses, without factoring in the potential for things going wrong. There are also times when the share market is far too pessimistic.

A share price is meant to reflect the long-term outlook and potential of a business. It shouldn't necessarily swing wildly every time the ASX share releases a trading update. But sometimes it does.

We shouldn't invest with a contrarian mindset just for the sake of it, but I believe we can take advantage of negative short-term thinking by other investors and make good long-term returns.

At the moment the financial conversation is being dominated by inflation and higher interest rates. Business valuations that have suffered heavily during this period may bounce back in two or three years when this period subsides. Keep in mind I said "years", not months for these potentially cheap ASX shares. It could still take some time for the economic picture to normalise.

Short-term pain for long-term gain?

Share prices often move ahead before the official numbers are reported and confirm the situation.

It's understandable that household budgets are suffering with everything that's going on. Investors are expecting pain for names like Adairs Ltd (ASX: ADH), Universal Store Holdings Ltd (ASX: UNI), Nick Scali Limited (ASX: NCK), Accent Group Ltd (ASX: AX1) and Lovisa Holdings Ltd (ASX: LOV). They could be cheap ASX shares.

COVID-19 boom times aren't going to return for retailers any time soon, but I think the current valuations represent excellent buying on a three-year(-ish) view. The outlook should improve at some point in the medium term when inflation has reduced, though I'm not trying to predict precisely when. Don't forget, Australia's population continues to increase, which should help long-term underlying demand for retailers.

ASX retail share returns could be boosted by good dividend yields as payouts recover in the medium term.

Another area to possibly find cheap ASX shares is smaller tech stocks which have not seen the same rebound as their large counterparts. In this area, I'm seeing much lower prices than the peak, yet promising underlying growth for the businesses like Bailador Technology Investments Ltd (ASX: BTI), Siteminder Ltd (ASX: SDR), Frontier Digital Ventures Ltd (ASX: FDV) and healthcare tech name Volpara Health Technologies Ltd (ASX: VHT).

The third area, which is a bit of a dark horse, is the real estate sector. Higher interest rate costs do hurt property valuations on paper, and it also increases the cost of debt. However, industrial properties are seeing low vacancy rates and strong rental growth, so Centuria Industrial REIT (ASX: CIP) and Goodman Group (ASX: GMG) are interesting opportunities.

Real estate fund managers have fallen hard, yet they continue to generate a lot of management fees and have significant asset backing on their balance sheets, so Centuria Capital Group (ASX: CNI) and DEXUS Property Group (ASX: DXS) could be interesting ideas.

Motley Fool contributor Tristan Harrison has positions in Bailador Technology Investments. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Adairs, Bailador Technology Investments, BetaShares Nasdaq 100 ETF, Frontier Digital Ventures, Lovisa, SiteMinder, and Volpara Health Technologies. The Motley Fool Australia has positions in and has recommended Adairs, BetaShares Nasdaq 100 ETF, SiteMinder, and Volpara Health Technologies. The Motley Fool Australia has recommended Accent Group, Bailador Technology Investments, Frontier Digital Ventures, Goodman Group, and Lovisa. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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