Buying these 4 cheap shares could mean I never have to work again

As someone in my 30s, I don’t think about my retirement age. All I know is that it’s too far. But if there’s some way to shorten my working career, I’ll take it. Fortunately, there are a few ways I can potentially do this. One of them involves buying cheap stocks from the stock market. That’s what I mean.

Looking for a really cheap one

I completely understand that calling something cheap is subjective. For a billionaire, a Ferrari is considered cheap. But when it comes to stocks, I can try and objectify it a little more.

A cheap stock is one that has fallen below its fair value. This may be because investors are too bearish, or because people do not correctly consider the future prospects of the business. Either way, the current price may not reflect the true value. So, if I buy this stock now, I can profit in the future if it rallies.

The traditional way to identify cheap stocks is the price-to-earnings ratio. It takes stock prices relative to the most recent earnings per share. If the ratio is low, then it can suggest that the stock is undervalued.

Another tool is historical stock price performance. In the past year, if the stock has fallen by a significant amount, this may indicate that it has been oversold. I can filter using the percentage return over a 12 month period.

Certain stocks I like

Based on the above, there are some stocks that I would like to buy now. This is included Marks & Spencer (P/E of 7.42) and Kingfisher (10.42).

I think it will take some time for the stock to rally, as UK consumers will feel the pinch for the rest of the year. However, I think there is good long-term value as the economy recovers. Indeed, Marks & Spencer’s share price could almost double from its current level before reaching the high of five years ago.

Aviva (4.87) and Legal & General (9.68) both seem undervalued to me. The insurance space is not going to be the most exciting area to invest in. The sector also has an inherent liquidity risk, which arises if there are many claims in a short period of time. But when trying to put money into it, I think it’s an exciting sector.

The resulting good level of cash flow allows the payment of dividends. Aviva Company currently pays a 5.51% dividend per share and an annual dividend yield of 7.16%. If the stock price goes up from here and the dividend stays the same, the yield will go down. Therefore, this gives me more incentive to buy now while it’s still cheap.

Potential earnings

Let me invest £150 a month into each of four stocks. I will assume an annual return of 10%, which includes dividend income and capital gains. I know that it is not guaranteed and I can gain less, or even lose money. But after 16 years, I could have a pot worth £285,000. From here, I can eliminate the annual dividend payment and get the share price gains and use it as income so I don’t have to work. In year 17, this will be £30.2k, without touching the rest of the portfolio.