Are these the FTSE 100’s biggest bargains?

Here are two potentially unappreciated gems in London’s top stock market index the FTSE 100 (INDEXFTSE: UKX).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Don’t you just love it when all the signs come together and make a share look irresistible? Here are two that look like serious bargains to me, with a lot in common.

A downtrodden winner

I know it’s the housebuilding sector again, but I remain convinced it’s seriously oversold in the wake of the EU referendum result. Berkeley Group Holdings (LSE: BKG) is my pick today, as I reckon it’s looking one of the cheapest of all. Here are the things I like about it…

First up, there’s loads of lovely cash. Berkeley ended the year to April with £107m of the stuff on its books, with cash due on forward sales of £3.25bn. In fact, it’s so awash with cash that it’s engaged in a plan to return a further £10 per share over the next five years — and that alone is a return of 39% on shares priced at £25.70 today.

That brings me to forecast dividend yields of 7.5%, which should be well covered by earnings both this year and next — since resuming dividends with a 74p payment in 2013, Berkeley’s annual cash handout is predicted to rise to 200p this year.

Berkeley’s shares have, like the rest of the sector, been hit hard by the Brexit decision, and have fallen by 22% since the fateful day. But that now puts the shares on forward P/E multiples of under seven! And that’s with rising EPS forecasts on the cards, even after recent post-vote updates.

I see super bargains in Barratt Developments on a P/E of 10, Taylor Wimpey on 9 and Persimmon on 9.5, but right now Berkeley is looking like the pick of the bunch.

Still flying

Though it’s not the kind of business I’d normally invest in, easyJet (LSE: EZJ) shares a lot of similarities with the housebuilders. The budget airline ended its third quarter to 30 June with £1.12bn in cash and money market deposits, and with £378m in actual cash — up from the interim stage three months earlier. In these allegedly tough times, that looks very tempting to me, especially as the company’s planes were 95% full of passengers in August.

Then we have strong dividends too. Though not up to Berkeley’s 7.5% level, easyJet is expected to deliver a yield of 4.4% this year, upped to 4.7% next. The shares are on low P/E values too, of 10 for this year dropping to 9.5 on 2017 forecasts. The only possible fly in the ointment is a 22% fall in EPS predicted for this year, but I reckon that’s more than compensated for by today’s low share valuation.

That valuation is, once again, the result of a Brexit hit, with today’s 1,080p representing a fall of 29% since referendum day — there was a bit of a recovery taking shape, but that’s tailed off in the past week.

There will almost certainly be a Brexit effect to some degree, but since their downgrade right after the vote, the City’s analysts have been keeping their forecasts steady for both earnings and dividends and they’re suggesting a 6% EPS recovery in 2017.

I see easyJet shares as too cheap now even if the recent gloom turns out to be spot on — but I also see the worries as too pessimistic, which means it could be time to buy.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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

More on Investing Articles

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »