The best cheap UK shares to buy in October 2022

What are the best cheap stocks to buy in October? We look at some of the best options available to investors this month.

Legal & General – a relatively safe port in the storm

Legal & General shares are down 10% this year to 254.6p. They were hard hit during the spring sell-off due to the outbreak of war in the Ukraine, but have recovered some headway this year. However, they still look undervalued at these levels and may be worth buying as they are still some way off their five-year highs of 306p seen in 2017 – and some analysts think they could rise further.

Legal & General is the UK’s largest investment manager of corporate pension schemes and a major global investor, with £1.3 trillion in assets under management globally. With a growing aging population, long-term trends are in its favour. As such, the insurer and retirement annuities provider posted a strong set of half-year results in August. Operating profits rose 8% to £1.2 billion, while cash generation increased by 22% to £1 billion.

The balance sheet also looks strong, with the group reporting a Solvency II coverage ratio3 of 212% at H1 2022, versus 187% at the full-year results in 2021, due to the impact of higher interest rates. Legal and General also delivered a return on equity of 21.3% under IFRS accounting rules (22% in the same period last year).

Analysts at broker Barclays recently set a price target of 390p for the shares. The shares also offer a general dividend yield of 7% and trade on a price earnings ratio of just 7.7.

Marks & Spencer – a long-term retail bargain?

Like most retailers, Marks & Spencer is feeling the pinch as energy prices soar, logistics costs rise and inflation hikes bite. As such, the shares have slid 41% this year to 110.6p. However, full-year results in May for the year ending 2 April were strong, with pre-tax profits before adjusted items up 30% to £522.9 million (from £403 million in 2020), while revenues grew 6.9% to £10.8 billion.

Clothing and home sales rose by 3.8% during the period, boosted by online sales, while M&S Food saw sales increase by 10.1% and grew market share. Meanwhile, international online retail sales grew to over £250m from £100m in 2019/20. The balance sheet is also looking more stable, with debts of £1.8 billion cut to £420 million. However, that said, the retailer can’t escape the widespread inflationary pressures and prospect of a recession.

“Customers' spending capacity is under pressure,” management told investors at the full-year results. “We expect these pressures to increase as the year progresses. We are therefore planning for an adverse impact on volumes due to price inflation, slowing the rate of sales growth.”

Marks & Spencer says it expects the impact of declining real incomes “to sharpen in the second half and endure for at least the remainder of the financial year.” Nevertheless, it’s worth remembering that many of M&S’ customers tend to be “wealthier”, as Begbies Traynor analyst Julie Palmer points out and therefore “less hard hit by rising costs.” Marks is in much better shape these days and looks well-placed to ride out the bad times.

The company is holding a capital markets day on 12th October, which, if it goes well could lead to broker upgrades. Meanwhile, half-year results are due on 9th November ahead of the all-important Christmas trading period. The retailer reports its post-Christmas trading update on 12th January next year.

While analysts at broker Deutsche Bank Aktiengesellschaft recently cut their price target to 145p from 155p on the shares, there is could still be decent upside potential. Although the share price recovery is unlikely to be immediate and the next year will be tough, the shares look oversold for those who have the patience to wait out the bad times.

Compass Group – showing resilience in tough times

Compass Group has come out of the Covid-19 pandemic as a surprise winner. The contract catering provider was hard hit at the start of the crisis when several major events were cancelled and it was forced to undertake a £2 billion rights issue.

However, since then, the company has enjoyed a recovery, seeing revenues exceed pre-Covid levels and securing £2.5 billion in new business over the past 12 months. In fact, while management is mindful of inflationary pressures, they believe that they will actually boost new business acquisition as customers look to save money by outsourcing their catering needs.

Half-year results in May were impressive, with pre-tax profits quadrupling to £632m (from £133m last year) and revenues up 36% to £11.5 billion. Plus, at the recent third-quarter trading statement underlying sales came in at 109% of 2019 levels, with organic growth of 43% (versus 37% at the half-year), while underlying operating margins improved by 40 basis points to 6.2% (from 5.8%).

As such, Compass increased its earnings guidance for the full year from around 30% organic revenue growth to around 35% and confirmed forecast operating margins of around 6%.

The shares have already had a good run this year and are up 22% to 1800.5p. However, they are still trading below their five-year high of 2094p and are worth buying for their resilient qualities in the coming economic storm. Analysts at Berenberg Bank recently upgraded their price target on Compass Group shares to 2,100p from 2050p.

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