The FTSE 100 achieved one of its best performances since the financial crisis last year. However, there are still a handful of companies in the index that appear to offer value at current levels.
Here are two blue-chip champions that still look undervalued and could yield an upside for investors of as much as 100%, according to my calculations.
Royal Bank of Scotland
RBS (LSE: RBS) has to be one of the most hated stocks in the FTSE 100. A decade ago, the lender was on the verge of bankruptcy and had to be bailed out by the taxpayer, almost wiping out shareholders in the process.
Today, the bank is in much better shape than it was 10 years ago. Its managers have worked flat out to rebuild the balance sheet, cut costs and improve efficiency. As a result of these actions, RBS is now solidly profitable, so much so that last year management decided to declare a special dividend for investors.
In 2020, City analysts are forecasting a net profit of £3bn for the group. Despite this impressive performance, the stock is only trading at a price-to-earnings (P/E) ratio of 10 and price-to-book ratio (P/B) ratio of 0.6. These metrics suggest the shares offer a wide margin of safety at current levels. Indeed, some of RBS’s international peers trade at a P/E a ratio of 1.2 or more, which suggests the stock could offer an upside of 100% from current levels.
On top of this capital gains potential, analysts believe shares in RBS will yield 6.5% in 2020, although if the lender performs better than expected, I wouldn’t rule out another special dividend over the next 12 months.
Barclays
Shares in RBS’s peer Barclays (LSE: BARC) appear to offer an even more significant margin of safety. The stock is currently trading at P/E ratio of 8.6 and a P/B ratio of 0.5.
Once again, these figures suggest the stock could offer upside of as much as 100% from current levels. Barclays also offers a dividend yield of 5.3%. However, the lender has a more prominent investment bank than its peer, which ties up more capital. So management is unlikely to announce a special dividend anytime soon.
Nevertheless, the payout is covered 2.4 times by earnings per share, so it looks as if there’s plenty of headroom for the distribution to grow from current levels.
Over the last decade, analysts have repeatedly questioned whether or not Barclays should be keeping its investment arm, but recent results from the company support management’s decision to hang on.
Pre-tax profits at the investment bank jumped by 77% to £882m in the third quarter of 2019. As stock markets around the world continue to head higher, it seems highly likely this trend is set to continue throughout 2020.
Additional good news from the bank over the next 12 months could power the share price higher as investors return to this deeply undervalued security.
