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Have £1,000 to invest? BP is a 5%+ yielder set to crush the FTSE 100

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The recent performance of the FTSE 100 has been exceptionally volatile. Investors are becoming increasingly nervous about the prospects for the world economy, with fears surrounding a full-scale trade war increasing in recent trading sessions.

This though, could present an opportunity to buy undervalued shares. BP (LSE: BP) is one example, with the company having a wide margin of safety. However, not all FTSE 100 stocks offer good value for money, with one expensive stock releasing a trading update on Thursday.

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High valuation

The company in question is wealth manager Hargreaves Lansdown (LSE: HL). Its quarter to 30 September 2018 saw the company deliver net new business of £1.3bn, with net new clients of 29,000. Its assets under administration of £94.1bn are 3% up on the figure from 30 June 2018, while net revenue for the period increased by 16% to £120.8m.

Despite its improving performance, the company’s share price declined by around 7% following the update. Investors seem to be concerned about the outlook for the business in what is set to be an increasingly volatile period for the wider industry. With this causing an industry-wide slowdown in net retail flows according to the company’s update, its growth prospects appear to be declining to at least some degree.

Even though its share price has fallen following the release of its trading update, Hargreaves Lansdown continues to lack a margin of safety. It has a price-to-earnings (P/E) ratio of around 43, which suggests that it is a stock to avoid at the present time.

Improving outlook

In contrast, the prospects for BP continue to be relatively bright. The oil price has the potential to move increasingly higher due to uncertainty among the production outlooks for a number of OPEC members. Alongside a fast-growing world economy, this means that there may be upward pressure on the oil price over the medium term.

Certainly, the prospect of a full-scale trade war could create additional uncertainty for the oil and gas sector. But with BP having a dividend yield of 5.5% and a P/E ratio of around 14, it appears to have a margin of safety factored into its share price. Since earnings are due to grow by 11% next year, a price-to-earnings growth (PEG) ratio of 1.3 provides further evidence that there could be an appealing risk/reward ratio on offer.

Certainly, the volatile nature of the wider resources industry is unlikely to subside over the medium term. As such, there could be disappointment for investors in the near term, and paper losses may be felt. But with what seems to be a sound financial outlook and a low valuation, the company appears to offer investment potential. With the scope to now invest in its asset base to a greater extent than in the past, BP could outperform the FTSE 100 and provide a high income return for its investors in the meantime.

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Peter Stephens owns shares of BP. The Motley Fool UK has recommended Hargreaves Lansdown. 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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