Related Articles
Image source: Getty Images.
April has seen a few upsets among FTSE 100 shares. It’s left a number of top companies on very low P/E ratios. Some, undoubtedly, deserve it. But times of huge uncertainty can lead the market to simply get some valuations wrong.
Here are three FTSE 100 stocks that I think are now undervalued, and that I might buy in May.
5 Stocks For Trying To Build Wealth After 50
Markets around the world are reeling from the current situation in Ukraine… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.
But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.
Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…
We’re sharing the names in a special FREE investing report that you can download today. We believe these stocks could be a great fit for any well-diversified portfolio with the goal of building wealth in your 50’s.
Click here to claim your free copy now!
Pandemic boost
Royal Mail (LSE: RMG) has given up much of its 2021 gains, dropping 28% over the past 12 months. We’re now looking at a trailing P/E ratio of only seven.
Is Royal Mail really only worth half the FTSE 100’s average valuation? I see undervaluation here, and I reckon the market is focusing too much on past troubles.
We’re due full-year results on 19 May. But in January’s Q3 trading update, the company said it was “confident there has been a structural shift in parcel volumes since the start of the Covid-19 pandemic“. It seems many people who switched to home deliveries during the pandemic like it and want to stick with it.
The dividend yield is not great, most likely around 2%. And Royal Mail faces risks with its modernisation plans and in the area of industrial relations. But at today’s valuation, RM is on my FTSE 100 buy list.
Cyclical earnings
Rio Tinto (LSE: RIO) shares are on a P/E of only around 5.7, based on the current share price and 2021 earnings. But when it comes to the mining sector, that can be misleading, and we can’t really compare to the FTSE 100 average.
Commodities prices are highly cyclical, often with years of low prices followed by booms. And over the past few years we’ve seen metals and minerals prices soaring. Looking back five years when prices were a lot lower, for example, Rio ended 2016 on a P/E of 16.
So when commodities prices are low, we see miners on higher valuations. And at the height of a cycle, P/E valuations fall. I just can’t help seeing the current Rio Tinto share price as being too low, though. Commodities prices remains strong, and forecasts show that strength continuing into 2023. On the back of that, I see further resilience in Rio Tinto’s earnings prospects.
FTSE 100 finance
FTSE 100 insurance firms look good value to me now, and I’m drawn to Legal & General (LSE: LGEN) on a P/E of less than eight.
On top of that low valuation, forecasts put this year’s dividend yield at 6.4%, when the FTSE 100 is expected to deliver around 4% overall. That looks attractive to me, but I want more than a high yield today. I also want to see decent cover by earnings, and a record of progressive rises.
I see both at Legal & General. Dividends have been growing slowly but surely over the past five years. And cover has been strong, coming in at 1.85 times last year.
The main downside I see is uncertainty and volatility over the coming 12 months. Inflation and economic troubles often send shivers through the financial sector. And, yes, war too.
But I do like LGEN’s investment management business. I’d buy on the strength of today’s low valuation and high dividend expectations.
