How to find cheap ASX value shares in the current market

Where is the value in such a hot market?

| More on:
Two excited woman pointing out a bargain opportunity on a laptop.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Australian stock market is riding high, but finding cheap ASX shares with good value remains a challenge.

As the S&P/ASX 200 Index (ASX: XJO) scales new peaks, some investors are wondering where to find value plays.

Remember – price is what you pay, and value is what you get.

With a forward-looking market and sky-high valuations across many sectors, paying a reasonable price for growth is critical. Here's where Wilsons Advisory sees the ball landing.

Cheap ASX shares in a roaring market

The ASX 200 has been propped up by a global equity market rally this year, with several index heavyweights posting double-digit returns.

While Australia's market has performed well, it has trailed behind the broader US market over the past year.

According to David Cassidy, head of investment strategy at Wilsons Advisory, the primary driver behind the ASX's gains has been price-to-earnings (PE) ratio expansion.

Cassidy says that over the past 12 months, the market multiple has risen from 14 times to over 18 times, limiting the number of cheap ASX shares on offer.

This is significantly above the ten-year average of 16 times and the twenty-year average of about 15. As such, it hasn't been corporate earnings growth driving the market.

The Australian equity market looks set to record zero earnings growth in CY24. CY25 earnings growth is expected to improve, but only to a still-moderate 5%. This compares to an index price gain over the past 12 months of 18%.

So the question is, where is the value?

While the broader market looks fully priced, Wilsons says that certain sectors and stocks may still offer value.

The first is healthcare:

In terms of sectors that look attractive, healthcare stands out as offering an attractive combination of a discounted multiple to its average valuation and attractive long-term growth. We remain overweight healthcare.

[CSL Ltd (ASX: CSL)] looks to offer a reasonable valuation with strong growth.

The next is within the energy sector. Among the resource sector, energy companies like Santos Ltd (ASX: STO) are trading at appealing valuations.

Cassidy says Santos offers "reasonable growth at an undemanding cheap valuation". 

Mid-cap and small-cap stocks are the final domain Wilsons suggests investors scour for cheap ASX shares.

The firm says that ASX large-caps look "fully priced", with valuations on the big four banks in particular "looking stretched".

While there are reasonably priced options within the market, it is hard to escape the conclusion that the large cap end of the Australian market is, on average, fully priced. In our view, this suggests that an active approach to the Australian market is required. 

What are the risks?

Finding cheap ASX shares means carefully selecting stocks with potential for growth that the market has not fully priced.

But hunting for investments on price or valuation multiples alone can lead to fool's gold.

Those familiar with the concept of a value trap will know that buying cheap stocks alone won't cut it. The key is to fill the other side of the equation – what you get in return for what you pay.

"A bird in the hand is worth two in the bush" type stuff. You have to get more in return for what you pay to have received value.

Foolish takeaway

Navigating the market for high-quality, cheap ASX shares requires a clear understanding of market conditions and individual stock opportunities.

But, as they say, buyer beware – price and/or multiples alone don't ascribe value. A comparison to growth is also needed.

Should you invest $1,000 in Flight Centre Travel Group Limited right now?

Before you buy Flight Centre Travel Group Limited shares, consider this:

Motley Fool investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and Flight Centre Travel Group Limited wasn't one of them.

The online investing service he’s run for over a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

And right now, Scott thinks there are 5 stocks that may be better buys...

See The 5 Stocks *Returns as of 30 April 2025

Motley Fool contributor Zach Bristow has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended CSL. The Motley Fool Australia has recommended CSL. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Value Investing

Smiling couple looking at a phone at a bargain opportunity.
Value Investing

2 ASX value shares for 2025

Both of these stocks seem too cheap to ignore.

Read more »

A woman wine tasting in a bottle shop.
Value Investing

ASX value shares rated as broker buys

The sell-off has opened the window for value plays to shine.

Read more »

A senior couple sets at a table looking at documents as a professional looking woman sits alongside them as if giving retirement and investing advice.
Value Investing

Forecast earnings growth of 10% a year but down 11%, is now the time for me to consider this ASX 200 high-flyer?

Despite recent good news, the shares are down...

Read more »

asx share price spark represented by smiling lady holding sparkler
Dividend Investing

9.6% yield! Is the second largest dividend on the ASX 200 one to consider snapping up today?

A dividend yield approaching 10% is bona fide catnip for income investors. But is there a catch?

Read more »

Three happy office workers cheer as they read about good financial news on a laptop.
Best Shares

Top oversold ASX shares to buy in February 2025

Hoping to bag an investment bargain this month?

Read more »

A person leans over to whisper a secret to a colleague during a meeting.
Value Investing

Warren Buffett sold over $134 billion worth of stock in 2024, but his most recent $200 million in purchases are sending a clear message to investors

Buffett is sending a warning to investors, but make sure you understand what his purchases are saying.

Read more »

A little brother and big brother stare back at each other, both have their arms crossed.
Value Investing

Here's why ASX value shares outperformed growth stocks in 2024

There was a 4.4% difference in total returns between value and growth shares last year.

Read more »

A woman sits at her computer with her chin resting on her hand as she contemplates her next potential investment.
Value Investing

2 ASX 300 shares this fund manager thinks are 'significantly' undervalued

These stocks have a lot of positives, here’s what you need to know…

Read more »