If you're an ASX investor, particularly one that follows the value investing tradition or just likes to buy your assets at a bargain price, chances are you are constantly on the lookout for cheap ASX shares.
Finding cheap ASX shares is always tricky. The ASX is full of companies that are trading at objectively inexpensive valuations. But what a successful investor needs to do is separate the high-quality companies being unfairly marked down by the markets from the shares that are cheap for a good reason and are likely to destroy your investment capital.
Now that's easier said than done.
But none other than our own chief investment officer, Scott Phillips, has a sector, and even a specific cheap ASX share, in mind for this endeavour.
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Scott Phillips: ASX retail shares are looking cheap
Scott recently spoke to Gemma Dale on NABtrade's Your Wealth podcast. During the chat, Scott identified retail stocks as some of the cheapest-looking shares on the market right now, despite the ever-present risk that the Australian economy might tip into another recession in the near future. Here's some of what he said:
I like holding businesses for years, and if you're going to do that, you have to find businesses that will continue to grow their value over years…
In times like these, you can look at the market and see opportunity that you don't have to work too hard for… and I have recommended and I own quite a number of retail stocks.
If you look at some of these businesses and you ask yourself whether they'll be around in five years' time. Let's say the worst happens, let's say we have a recession in 2024… and then, in theory, the recession lasts for… let's say 12 months…
Go through to 2028, four years after any recession, any decent company that does manage to survive through that period is probably going to be as profitable, more profitable, than it was leading into a recession.
Scott went on to name ASX 200 retail share JB Hi-Fi Ltd (ASX: JBH) as one stock that he reckons is looking cheap at its current price-to-earnings (P/E) ratio of 9.65.
Here are his thoughts on JB Hi-Fi shares:
If you look at the P/E ratios, and say 'I can own JB Hi-Fi at 8.9 times earnings now, and in five years' time, if JB Hi-Fi is as big or bigger… I think it's very likely that we look back at a JB Hi-Fi and think 'why did we not think JB Hi-Fi would be fine, to continue to flourish and be more profitable…' So that's where I think one of the opportunities in retail is.
But think about a couple of things. About whether the retailer you're buying will make it through sales wise, make sure they don't have too much debt, make sure they are going to get through to the other side. That's really important. But if you consider that as likely… then what we end up with is a high quality business, bigger than it was in 2023 that I got at a knockdown price.
JB Hi-Fi share price snapshot
As Scott implies, the JB Hi-Fi share price has had a bit of a stagnant run in recent years. The company last peaked in early 2022, rising above $56 a share.
But today, JB is trading at $47.46 at present, essentially at the same level it was back in August of 2020 and down more than 15% from its 2022 peak. Here's a look at the retail stock's five-year share price history:
At the current JB Hi-Fi share price, this ASX 200 retail stock has a market capitalisation of $5.19 billion, with a trailing dividend yield of 6.57%.
