£20k in savings? Buying cheap shares in an ISA could help you retire early

It’s no secret that buying cheap shares can lead to some tremendous returns.

A perfect recent example of this in action is Rolls-Royce, which has seen its stock price surge by more than 1,200% in the last three years following a successful turnaround by new management. And for those smart enough to use an ISA, all of these gains have been tax-free.

But with a forward price-to-earnings ratio of almost 42 today, Rolls-Royce shares no longer fit into the ‘cheap’ category. And with a lot of its future growth expectations baked into its valuation, it’s unlikely that another quadruple-digit gain will emerge between now and 2029.

Luckily, there are plenty of other cheap shares to explore in 2026. The question now is, which companies should investors be looking at?

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A strong contender

Right now, Diageo (LSE:DGE) looks like a promising candidate for a business primed for a rebound.

Through a combination of macroeconomic turmoil and strategic missteps, Diageo’s market-cap has collapsed by close to 60% since early 2022. During that time, sales have remained relatively flat, but earnings have fallen drastically, leaving investors justifiably disappointed, leading to the steady decline.

However, skip ahead to 2026, and the firm’s fortunes could be changing. With a new CEO at the helm, the company’s already in the process of optimising its product portfolio – seeking to sell off underperforming brands while doubling down on the most popular ones.

Investors are now eagerly awaiting a more detailed progress update coming later this week. But with Diageo shares still priced below its peers, the announcement of new asset sales, debt reduction, and cost-cutting programmes could trigger a wave of optimism that could later evolve into a full-blown recovery rally as the financials improve.

A recovery rally isn’t guaranteed

New CEO Dave Lewis has a pretty solid track record of delivering operational and financial turnarounds for FTSE 100 companies, previously working his magic at Tesco. However, his experience within the alcoholic beverages industry is fairly limited. And operational challenges aren’t the only thing holding Diageo back.

Rising health consciousness, combined with lower discretionary income, is resulting in falling alcohol consumption among younger generations. Diageo has sought to offset this decline in volumes through a premiumisation strategy. Yet this strategy has so far had mixed results, and Lewis has yet to outline his plan to tackle this structural headwind.

Another challenge is debt. The group has just over $23.7bn worth of outstanding loans & equivalents on its balance sheet, that’s accruing interest and squeezing profit margins.

Proceeds from asset sales can help chip away at this mountain of debt. But the firm will undoubtedly also have to allocate some of its free cash flow to make meaningful progress in debt reduction. And that could put dividends temporarily on the chopping block – something that could spook income investors in the short term, even if it’s financial prudent.

What’s the verdict?

Today, investing in Diageo is very much an investment in Lewis. There’s no denying that a full recovery is going to be a challenge. But few CEOs have such impressive turnaround credentials. And with some seemingly prudent moves already being made paired with a still-discounted valuation, it’s a risk that might be worth considering.

The post £20k in savings? Buying cheap shares in an ISA could help you retire early appeared first on The Motley Fool UK.

More reading

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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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