Are these the best cheap ASX stocks to watch?

The ASX 200 has risen substantially from its October 2023 lows of less than 6,800 points to circa 7,640 points today. Naturally, this means that many of what are perceived to be the ‘cheapest’ ASX companies have recovered more of their fair value — almost regardless of sector.

This recovery could be at least partially due to the improving macroeconomic environment. While the annual rate of inflation is expected to be roughly 3.5% in January, the markets are pricing in at least one rate cut by August 2024, and more thereafter. The cash rate remains at 4.35%, with the next RBA board meeting scheduled for 19 March.

For perspective, the RBA has downgraded Australia’s annual GDP growth in 2023 from 1.6% to 1.5%. And in November, the board thought the economy would grow by 1.8% in the financial year to June 2024 — but has downgraded this prediction to just 1.3%. Commonwealth Bank is predicting that the cash rate will fall by 75 basis points by the end of 2024.

On the fiscal policy front, stage three tax cuts are expected to start from 1 July, which when combined with potential rate cuts could see stronger economic growth in the latter half of the calendar year.

This could all bode well for cheap ASX growth stocks.

Best cheap ASX stocks to watch

The following shares have been selected for their recent market news, including new broker comments.

1. Domino's Pizza Enterprises
2. IDP Education
3. Rural Funds Group
4. Tabcorp
5. Lovisa

Domino’s Pizza Enterprises

Domino's Pizza Enterprises is the franchise holder for shops covering a multitude of countries across Europe, Asia, Australia and New Zealand. The stock recently reported a sharp slowdown in sales in Malaysia and Japan which contributed to a 31% one-day fall in late January.

However, recent half-year results may see the company turn a corner. Network sales rose by 8.8% year-over-year to $2.14 billion, while same store sales growth came in at 1.25%. Further, all-important online sales increased by a double-digit 11.8% to $1.71 billion.

On the other hand, EBIT fell by more than 5% to $107.9 million, and accordingly, net profit after tax also dropped by 13% to $62.3 million. But broker Jarden Securities has increased its rating on the ASX company to ‘overweight’ with a $49 price target — and clearly sees upside recovery potential.

IDP Education

IDP Education is a well-known provider of English language tests and international student placements. Like Domino’s the ASX company has lost significant value, having lost more than a third of its market capitalisation over the past year.

Arguably this fall can be attributed to external shocks rather than any internal fault. Student visas are being tightened up considerably in its target markets — and it also recently lost its language testing monopoly in Canada.

For context, FY23 revenue rose by 24% to a record $982 million, while EBIT increased by 40% to an all-time-high of $228 million. Of course, recent events may put a dent in the growth story, but the sell-off may be unjustified.

Goldman Sachs analysts have a ‘buy’ rating on the company with a $27.60 price target, arguing that its ‘fundamental quality and structural growth drivers remain intact while the company possesses levers to continue to grow earnings.’

Rural Funds Group

Rural Funds Group is an A-REIT (real estate investment trust) which, unsurprisingly given the name, invests in agricultural assets and farmland.

At the start of 2022, shares in the REIT were changing hands for as much as $3.18, but they have now fallen to just $2.12. This may simply be a function of higher interest rates, which hurt both property values and borrowing power — and while the cash rate may be elevated right now, most major banks think it will start to fall in 2024.

Further, the A-REIT owns quality assets including cattle, cotton, and macadamia nut farms. In half-year results, property revenue increased by 12.4% to $42 million, while earnings increased by 19.5% to some $71 million amid asset revaluations.

The lowered REIT value has also had a positive effect on the dividend yield, with Rural Funds now paying out circa 5.5%. For context, Bell Potter analysts recently noted that its ‘share price has continued to remain subdued and trading at its largest discount to market NAV since listing,’ and they expect the dividend yield to remain attractive over the medium term.

Tabcorp

Tabcorp has been volatile since September 2023, and has slid from a previously stable circa $1 per share to $0.70 today. But this may make the gambling and gaming company attractive to value investors on some metrics, especially given the recent investments in new platforms and AI technology.

Half-year results did see revenue fall by 5% year-over-year to $1.21 billion, leaving the ASX company with a statutory net loss after tax of $636.8 million.

Positively, it did declare a fully franked dividend, but of just 1 cent per share. But the business pointed out that this represented a payout well above 100%, reflecting ‘confidence in the business and a strong financial position.’

Encouragingly, Macquarie has just increased its rating to ‘outperform’ with an $0.85 price target — which may appear achievable given that the stock was at this level mere months ago.

Lovisa

Lovisa is arguably one of the best ASX growth stories in recent years, having risen by 195% over the past five years, and also having strongly recovered from its first-half dip. And the affordable jewellery company may have further to run.

In half-year results, Lovisa saw revenue rise by a respectable 18.2% year-over-year to $373 million, with net profit after tax rising by a corresponding 12% to $53.5 million. And the company declared a $0.50 per share dividend, 30% franked. It also opened 74 net new shops in the six month period, including entering both China and Vietnam. It now boasts an 854-strong portfolio.

Citi analysts appear impressed, enthusing that ‘Lovisa has delivered another strong result and is successfully evolving into a global retailer.’ They now have a ‘buy’ rating on the retailer with a $31.65 price target.

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