With the stock market going through a correction, there are undervalued UK shares trading at significant discounts that investors can profit from. For investors like Warren Buffett, a major focus is to buy such value stocks. Why? Because it allows individuals to buy companies for less than what they are actually worth.  

A common metric for measuring whether a stock is undervalued or overvalued is the price-to-earnings ratio. In most instances, when the PE ratio is high relative to a stock’s competitors, it’s considered overvalued, and vice versa. There are plenty of reasons why a stock can become over or undervalued. However, successfully identifying the latter of a fundamentally strong business can lead to explosive returns in my experience. With that in mind, here are three cheap UK shares I think are ready to surge.

Best undervalued insurance UK share to buy?

Aviva (LSE:AV) currently has a PE ratio little above 9. As said earlier, a low PE ratio in most instances indicates an undervalued stock. The company was hard hit by the global pandemic, reaching a 52 week low of 255p in early November last year. Consequently, the firm’s financial results have been relatively poor lately.

However, with the insurance business poised to recover, Aviva’s stock price may follow suit. And it looks like this has already begun. Since the start of 2021, this potentially undervalued UK share is up around 23%. And since I think there remains plenty more room for recovery, Aviva looks like a sound investment decision for my portfolio.

An undervalued cinema company 

The share price of Cineworld Group (LSE:CINE) has been relatively flat since the start of 2021. But over the last 12 months, the stock is up by just under 120%. The group is one of the largest British cinema companies, with about 9,500 screens in over 800 locations. Most of the business’s revenue is made from its US cinemas, while the UK and Ireland cinemas account for the rest.

When the pandemic struck, cinemas in the United States and the United Kingdom had to close their doors to customers. The sudden disappearance of a revenue stream led to the collapse of this UK stock back in early 2020. Since then, things have improved. Film studios are releasing new movies at an accelerating pace, and with pent-up demand, ticket sales are back on the rise. That’s why I think this uk company is poised to make an explosive comeback.

However, I think it’s also worth noting that management has racked up a lot of debt that could signify a value trap. And now that interest rates are on the rise, this could spell additional trouble for the group, given its weak balance sheet.

Return of UK aerospace shares

BAE Systems (LSE:BA) is a multinational aerospace company with headquarters in London. It’s the largest defence contractor in Europe and the world. Bae Systems has a PE ratio of a little over 10 and is one of my undervalued UK shares, which I believe is bound to rise. Why? Because the company was recently awarded an $872m contract by the US Army for a Limited Interim Missile Warning System. And with military budgets expanding again with the end of the pandemic, I think this could be the first of many new lucrative contracts.

The company’s share price is already on the rise. Since the start of the year, it’s up over 13% and 34% over the last 12 months. Therefore, I believe the Bae System shares are one of the best undervalued UK shares to buy for my portfolio today.

The downside of buying cheap stocks

Undervalued stocks can be an attractive buy. However, sometimes these shares are priced low for a good reason. And even if an investor successfully identifies some cheap UK equities, it could take a long time before the UK economy and stock market, in general, corrects the price.

Prosper Ambaka does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned at the time of writing. Views expressed on the companies and assets mentioned in this article are those of the writer and, therefore, may differ from the opinions of analysts in The Money Cog Premium services.