3 bargains for £5 or less

Finding the market's most undervalued stocks can be a difficult task. You need to be prepared to make a trade-off between value and quality and pay more for higher quality stocks. Just because an equity is cheap does not mean it is worth buying.

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It does not actually matter what price a stock is. It is deemed expensive or cheap by investing valuations and an analysis of the underlying fundamentals.

So how do you find a truly 'cheap' stock" To help you on your way, here are three UK equities for around £5 that all seem to be undervalued.

Dart Group(LSE: DTG) shares trade at 520p and City analysts are expecting earnings per share of 49p for the fiscal year ending 31 March 2017, down 19% year-on-year. As earnings per share are expected to fall this year, the market has placed a valuation of 10.4 times forward earnings on Dart's shares.

This valuation may seem appropriate, but over the past five years, its earnings per share have grown just under 300%, from 16p to 61p. After this explosive growth, Dart's upward curve is expected to take a breather over the next two years, with earnings per share falling back to 39.4p for the fiscal year ending 31 March 2018. However in the year after, growth of 14% is expected.

Based on current projections, even at its lowest point over the next two years, shares in Dart will continue to trade at a forward P/E of less than 13, an attractive multiple worth paying for a company with such a stellar record of growth.

Drastically undervalued

I believe Carillion (LSE: CLLN) is one of the most undervalued companies in the UK today. The construction services group has reported steady growth over the past five years. Pre-tax profit has grown from £165m to £181m, although over the same period earnings per share have declined by around 15%. Still, over the next three years City analysts expect earnings per share to tick higher by 4%.

Ok, you may say that this is hardly anything to get excited about. But when you consider the fact that the shares trade at a forward P/E of 6.6 and support a dividend yield of 8.3% with the payout covered twice by earnings per share, Carillion looks extremely attractive as an investment.

Dividend hike

At 481p, shares in Redrow (LSE: RDW) are affordable for most investors and the underlying valuation of the business is also attractive. Shares in the company trade at a forward P/E of 7.5 an City analysts are forecasting earnings per share growth of 12% for the fiscal year ending 30 June.

Over the past five years, the firm has increased earnings per share by 470%, and recently management rewarded shareholders by hiking the company's dividend payout by 40%. The shares currently support a dividend yield of 2.9%.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Redrow. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.