Cheap stocks are getting incredibly hard to come by among FTSE 100 constituents. As the stock markets stay buoyant, share prices are rising fast too. But there are still some stocks that can be seen as relatively cheap. To figure out which ones these are, I first consider the price-to-earnings (P/E) ratio for the FTSE 100 index as a whole. This is around 20 times.
Many of the stocks that are performing well right now have P/Es well over this level. But there are some around that have lower P/Es too. This is important, because it suggests that these stocks could be undervalued compared to the average FTSE 100 stock. This in turn means that their share prices could rise in the near future.
Hikma Pharmaceuticals: beaten down FTSE 100 stock
One such stock is the pharmaceuticals company Hikma Pharmaceuticals. It has a P/E of 15.2 times, which is not terribly low, but is still lower than average. This leaves some room for growth. But I believe that there could be even more upside considering that it has just delivered robust results.
Moreover, its share price has come off in the past year. As I write, it is down by more than 12% from the same time last year. I think this is a good reason to buy the stock, which has given some 300% return over the last 10 years, albeit with a fair bit of fluctuation in the intervening period. It is definitely a stock on my wish list right now.
Persimmon: attractive dividend yields
The FTSE 100 house builder Persimmon has a similar story. It has a relatively low P/E of 11.2 times, at least partly because its share price has gone nowhere in the past year. In fact, it has shown a small decline. But over the past decade, it has been an excellent stock to hold. It has grown by more than 500% over this time! And here is another good bit: it also has an attractive dividend yield of 6.5%.
The outlook for property stocks is a bit iffy for next year considering that supportive government policies are being withdrawn. Yet, over the long term, I think this is a winning stock, even if it sees ups and downs during the course of the business cycle. I bought the stock for the long term for this reason a few months ago.
3i: impressive returns
Last is the investment company 3i, which has given the best returns among the three stocks in consideration here, of almost 700% over the last 10 years. It has also risen some 30% over the past year, though its P/E remains low at 4.5 times. If I consider its price to net asset value, the more popular indicator for measuring investment companies’ value, it does appear a bit overvalued.
Still, it recently delivered good results and is also optimistic about the future, which suggests to me that at a buoyant time for the stock markets, its share price could continue to rise. The stock is a buy for me.
Manika Premsingh owns shares of Persimmon. The Motley Fool UK has recommended Hikma Pharmaceuticals. 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.