Beware these bargain FTSE stocks! Here’s why I’m avoiding these 2 dirt-cheap shares today

Everybody loves bargain FTSE stocks but, unfortunately, I think these two are simply too risky for you to invest in today. I certainly wouldn’t.

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Everybody loves to buy bargain FTSE stocks, but you have to tread carefully. Some bargains are just too risky. Like these two.

The FirstGroup (LSE: FGP) share price is down more than 13% this morning after it reported a statutory operating loss of £152.7m in the year to 31 March. That starkly reverses last year’s £9.8m profit. Revenues rose 8.8% to £7.75bn. But pre-tax losses nonetheless climbed sharply, from £97.9m last year to a hefty £299.6m.

The FTSE 250-listed bus and rail operator, which operates in the UK and US, blamed losses on a North American self-insurance provision, Greyhound impairment charges, restructuring and reorganisation costs and, of course, Covid-19.

Bargain FTSE stocks I’d avoid

Although the pandemic only affected the end of the year, it still cut average passenger volumes by around 90% by the end of March, with international lockdowns in place and the North American schools it serves closed.

Chief executive Matthew Gregory said guidance for this financial year is simply “not possible” as travel volumes have “reduced very substantially.” As the US struggles with the first wave of coronavirus infections, that looks set to continue.

Gregory says FirstGroup’s long-term fundamentals remain “sound.” It has fiscal and contractual support for running essential services during the pandemic, but admits to “material uncertainty as to the continuation of these measures.” It also has committed undrawn liquidity of around £850m at the end of June.

The FirstGroup share price looks like a FTSE bargain, trading almost 70% below its pre-pandemic peak. But the road to recovery looks too long, bumpy and fraught with potholes for me. Plans to sell its North American operations could stall, given current uncertainties. Investors are selling. I’m not buying.

I wouldn’t buy this share either

Now here’s a bargain FTSE 100 stock I’d love to buy, but won’t. Coincidentally, insurer Prudential (LSE: PRU) is also looking to reduce its US exposure, to concentrate its firepower on Asia instead. It’s selling a stake of it US arm Jackson to Athene Holding for $500m. Athene will also reinsure a $27.6bn portfolio of annuity liabilities.

Prudential has already backed away of the UK, selling UK fund management arm M&G and £12bn of its UK annuity portfolio. Trading at less than nine times earnings, this stock looks like a classic FTSE 100 bargain. But here’s why I wouldn’t buy it.

The Prudential share price remains vulnerable to political uncertainty in Asia, as China cracks down on Hong Kong democracy. That’s a problem, given that revenues from the territory make up a third of sales. Locals have been buying less insurance while China-based customers have stayed away, due to fear of hostility towards mainlanders.

On Monday, I warned against investing in Asia-focused banks HSBC Holdings and Standard Chartered. This morning, shares in HSBC plunged on reports that the White House may undermine the peg between the Hong Kong and US dollars.

This added layer of uncertainty means I wouldn’t buy Prudential either. Shame. Otherwise it looks like a top FTSE 100 bargain.

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.

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Prudential. 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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