Cheap ASX shares are always front of mind for the intelligent investor. And in 2024, some big names on the ASX have taken a tumble, sending shares double-digits into the red since January.
Shares in Woolworths Group Ltd (ASX: WOW), Ramsay Health Care Ltd (ASX: RHC), and Pilbara Minerals Ltd (ASX: PLS) have each pushed lower this year.
But just because the share prices are down, does this mean they are cheap? What is 'cheap', anyway?
A convenient way to answer these questions is by using relative valuation multiples, such as the price-to-earnings (P/E) ratio. This brings things into a common size by showing how much investors are paying for $1 of a company's earnings.
We can then compare this to some form of benchmark to gauge whether there is value on offer or not – that is, cheap ASX shares.
The iShares Core S&P/ASX 200 ETF (ASX: IOZ) is designed to track the performance of the S&P/ASX 200 index (ASX: XJO).
Whilst it isn't always a perfect replication, it does a good job of representing the benchmark. The ASX 200 exchange-traded fund (ETF) currently trades at a P/E of 21. Keep that in mind.
Let's see if the market has unfairly punished these large caps or if they're justifiably priced.
Cheap ASX shares – or not?
Here's a hint: Cheap ASX shares usually trade at low valuation multiples. With that in mind, you might have to take a second glance when valuing Woolworths.
At the time of writing, the retail giant trades on a P/E ratio of 375.
In other words, investors are paying $375 for a dollar of the fresh-food people's profits. This is a wide gap compared to the benchmark's multiple of 21.
By that measure, Woolworths isn't your typical "cheap" ASX share by any means. However, it does have many defensive qualities, and a steadily flowing dividend stream is notable.
But you are paying a premium to participate in that upside.
Goldman Sachs has a buy rating on Woolworths with a $40.10 price target, suggesting a potential upside of 21.5% from current levels.
Woolworths is down 11% this year to date.
Ramsay Health Care: still pricey
Ramsay Health Care has seen its share price decline by more than 18% this year, raising questions about whether it's now in bargain territory.
The company's P/E ratio of 36 isn't as sky-high as Woolworths but is still pricey – especially compared to the benchmark.
Again, buying Ramsay today you are paying a premium valuation to the ETF tracking the broad market.
Rumours of a takeover by private equity giant KKR of Ramsay have been swirling, but this doesn't suggest it is undervalued.
KKR was willing to pay $38 per share according to its offer, down from a revised $88 per share in a previous bid. Talk about cheap ASX shares.
With Ramsay trading at more than $42 per share at the time of writing, it is priced above KKR's valuation of the company.
Despite this, Shaw and Partners believe the stock was oversold in early September.
According to my colleague Bernd, Shaw analysts tipped a potential improvement in FY25, saying Ramsay was "well managed".
Pilbara Minerals: Riding the lithium wave
Lithium miner Pilbara Minerals has been on a rollercoaster ride, with shares down nearly 23% this year to date.
In saying that, the stock has rallied more than 10% in the past month amid some short-term strength in lithium prices.
Investors have flocked back to names such as Pilbara Minerals as several events that may impact the demand and supply of battery metals may come into play.
Despite this, Pilbara's P/E ratio is sitting at a high figure of 37 times. Again, this is more expensive than the benchmark.
It is difficult to call it a cheap ASX share on that basis.
Citi has a neutral rating and a price target of $2.90 on Pilbara Minerals, suggesting 4% downside potential at the time of writing.
Cheap ASX shares takeaway
While they've been heavily sold, these stocks don't fit the conventional mould of cheap ASX shares. If they were trading at a P/E ratio less than the benchmark, this might be a different story.
For now, there are plenty of names out there that do fit the bill.
