In my opinion, the FTSE 100 contains some of the best stocks to buy now. Here are two companies I believe are too cheap, based on their long-term potential.
The first on my list is the life insurance and pension management group Phoenix (LSE: PHNX). This organisation provides a relatively complex but lucrative service.
Managing pension funds can be capital-intensive, costly and fraught with regulatory risks. Even for other blue-chip companies, such as Marks & Spencer, it can be easier to outsource pension management or negotiate agreements to reduce liabilities.
Phoenix’s specialises in the acquisition and management of pension funds. By focusing on this one core area, the group can efficiently manage these assets and profit handsomely.
This business model is highly profitable, and Phoenix is committed to returning capital to investors. Analysts are predicting a 6.6% dividend yield for 2021, although this is just a forecast. At the same time, the stock is trading at a forward P/E of 8.8. Once again, these are just forecasts, but I think the company is far too cheap, considering its potential.
I’d buy the FTSE 100-listed group because I believe it has tremendous growth potential. Other blue-chips are queuing up to offload their pension obligations and this presents an enormous opportunity for the group.
That said, this company isn’t without its risks. Additional layers of regulation could increase the group’s costs, pushing down profit margins. Phoenix’s large balance sheet is also complex to understand. This could mean the organisation is exposed to significant risks, which aren’t entirely visible to investors until it’s too late.
Best stocks to buy now
I believe one of the best investments over the next few years will be resource companies. There are two reasons why. First of all, countries worldwide are planning to spend tens of billions of pounds over the next few years on infrastructure projects.
Secondly, some economists expect inflation to increase dramatically over the next few years, and commodity prices tend to increase during periods of high inflation.
So I think Anglo American (LSE: AAL) is one of the best shares to buy now in the FTSE 100 to play this theme. I’d buy the stock for my portfolio because it has a diversified collection of resource assets around the world. It produces commodities such as copper, iron ore, coal and platinum group metals.
Rising commodity prices are already having an impact on its bottom line. It’s expected to yield a total net income of $6.7bn for 2021, up from $3.6bn in 2019. Based on these estimates, the stock is trading at a forward P/E of less than 8. I think that’s far too cheap, considering its potential.
Of course, these are just projections at this stage. Commodity prices can be incredibly volatile. They can rise and fall dramatically over the space of a few weeks. As such, there’s no guarantee the company will hit this earnings target for the year. What’s more, the cost of producing commodities can increase in line with prices as suppliers try to take advantage of a booming market. These are the two most significant risks Anglo faces right now.
Nevertheless, as a way to invest in the commodity boom, I think this is one of the best shares to buy now in the FTSE 100.