The best cheap stocks to watch on the ASX

Why invest in cheap stocks

The attention of the investment community is often dominated by companies whose share prices have recently skyrocketed or are currently on a rapid, upward trajectory.

Oftentimes, however, the investment opportunities offering the best returns lie amongst those cheaper stocks that have fallen out of favour or been temporarily mispriced by the market.

Despite their ability to optimise economic efficiency, markets are not always infallible, and information asymmetries can serve as a source of asset mispricing, especially in the short run.

The entire investment philosophy of Benjamin Graham - the father of value investing and Warren Buffet's biggest influence, is based upon buying the stocks of companies when they're underpriced, in order to obtain them at a discount compared to their intrinsic value.

The rational pursuit of self-interest by human beings is what makes markets work, uncovering the true values of goods, services and assets by means of purchasing decisions and price adjustments

Graham believed, however, that stock markets served best as accurate 'weighing machines' of company values over the long run. In the short run they are more akin to voting machines, susceptible to erratic fluctuations that mean share prices may not always serve as reflections of true value.

For this reason, there are some situations where companies may see their share prices fall beneath a reasonable valuation based upon a rational assessment of their underlying fundamentals.

These declines mean their shares can be acquired at a potential discount, creating the opportunity for greater capital gains than those stocks that are already riding high on popular buzz, and as a consequence may be approaching a peak in value.

Australia is an advanced economy, with highly developed stock markets in which sophisticated institutional investors play a dominant role.

There may still be occasions, however, when Graham's insights into the capital market remain applicable to Australian equities, and investors can pick up cheap ASX-listed stocks at a discount to their true value over the long run.

The top 4 cheap stocks to watch on the ASX

Here is a list of five of the top ASX-listed stocks that could be a bargain for Australian investors in search of cheap share prices as of April, 2024.

1. Woolworths Group Ltd (ASX: WOW)
2. Zip Co Ltd (ASX: ZIP)
3. TPG Telecom (ASX: TPG)
4. Domino's Pizza (ASX: DMG)

Woolworths Group Ltd (ASX: WOW)

Woolworths Group Limited is one of Australia's most iconic brands, owning a network of stores across the country that are synonymous with supermarket shopping.

In addition to its eponymously branded supermarket chain, Woolworths also owns Big W - a department store chain that is another iconic brand for Australian consumers.

Woolworths' share price has struggled in 2024, with a drop of more than 14% year-to-date. The surprise departure of CEO Bradford Banducci in February weighed heavily on prices, as did losses after significant items of $781 million for H1 FY24, primarily due to the $1.5 billion non-cash write-down of the company's New Zealand operations.

Given its iconic status and ubiquitous presence, however, Woolworths is unlikely to be going anywhere soon, and could currently be a bargain investment.

Zip Co Ltd (ASX: ZIP)

Zip (ASX: ZIP) is one of the leading players in the burgeoning buy-now-pay-later (BNPL) market - perhaps the one sub-sector of the fintech market where Australian companies have made the biggest impression.

At first blush, Zip may not seem like a cheap stock, given that the company's share price has leapt by more than 267% over the past six months.

Zip's share price has dropped more than 20% in the last month, however, declining considerably following the release of Q3 results on 16 April.

Its quarterly results weren't dismal, however, with Zip posting a 14.6% YoY rise in total transaction volume fo $2.4 billion, alongside a 26.6% increase in revenue to $219 million.

The platform's share price could soon receive a boost from highly anticipated rate cuts by the Reserve Bank of Australia (RBA). While interest rate cuts are a positive for stocks across the board, they are especially favourable for BNPL platforms, reducing both the cost of funding and the pricing of their products.

TPG Telecom (ASX: TPG)

Sydney-headquartered TPG Telecom (ASX: TPG) is the second-largest telecommunications company listed on the ASX as well as Australia's third-largest wireless carrier. The company lays claim to a raft of leading brands on Australia's retail Internet market, including AAPT, iiNet Vodafone, TPG and Lebara.

The company's share price has struggled since the start of 2024, falling over 17% year-to-date.

Analysts from Morningstar are upbeat about the company, expecting earnings to rise on the back of rationalisation of the Australian mobile market, benefits from the transition to 5G as well as growth in TPG's fixed wireless and corporate division.

It forecasts compound annual growth of 5% in TPG's adjusted EBITDA over the next half-decade.

Domino's Pizza (ASX: DMP)

Domino's Pizza Enterprises Ltd (ASX: DMP) is another iconic brand for Australian consumers whose stocks have taken a battering since the start of 2024. The pizza chain's share price has dropped by over 34% year-to-date.

The Domino's brand first originated in the US, following the acquisition of a small pizza chain in Michigan by company founder Tom Monaghan at the start of the 1960s.

The brand first established a presence in Australia in 1983, with the opening of a store in the Queensland suburb of Springwood.

As a franchisee for the US brand, DMP has since emerged as the largest pizza chain in Australia in terms of outlets and sales, with around 700 stores across the country in both the capital cities and rural centres.

DMP has also expanded globally, with the acquisition of franchises in both Europe and Asia, in countries including New Zealand, Belgium, France, the Netherlands, Japan, Malaysia, Germany and Denmark.

This widespread network and the strength of the Domino's brand could favour the fortunes of the company in future, particularly as consumers make increasing use of food delivery services courtesy of Internet apps.

Morningstar analysts are highly upbeat about DMP, forecasting a compounded annual growth rate in earnings of 24% over the next five years. They also see its network of stores expanding to 6,200 by the 2033 fiscal year, as compared to around 3,800 as of June 2023.

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