3 cheap FTSE 100 shares to buy in May

FTSE 100 volatility in April has left a lot of shares looking seriously undervalued to me. Here are three I’m eyeing up with a view to buying in May.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

April has seen a few upsets among FTSE 100 shares. It’s left a number of top companies on very low P/E ratios. Some, undoubtedly, deserve it. But times of huge uncertainty can lead the market to simply get some valuations wrong.

Here are three FTSE 100 stocks that I think are now undervalued, and that I might buy in May.

Pandemic boost

Royal Mail (LSE: RMG) has given up much of its 2021 gains, dropping 28% over the past 12 months. We’re now looking at a trailing P/E ratio of only seven.

Is Royal Mail really only worth half the FTSE 100’s average valuation? I see undervaluation here, and I reckon the market is focusing too much on past troubles.

We’re due full-year results on 19 May. But in January’s Q3 trading update, the company said it was “confident there has been a structural shift in parcel volumes since the start of the Covid-19 pandemic“. It seems many people who switched to home deliveries during the pandemic like it and want to stick with it.

The dividend yield is not great, most likely around 2%. And Royal Mail faces risks with its modernisation plans and in the area of industrial relations. But at today’s valuation, RM is on my FTSE 100 buy list.

Cyclical earnings

Rio Tinto (LSE: RIO) shares are on a P/E of only around 5.7, based on the current share price and 2021 earnings. But when it comes to the mining sector, that can be misleading, and we can’t really compare to the FTSE 100 average.

Commodities prices are highly cyclical, often with years of low prices followed by booms. And over the past few years we’ve seen metals and minerals prices soaring. Looking back five years when prices were a lot lower, for example, Rio ended 2016 on a P/E of 16.

So when commodities prices are low, we see miners on higher valuations. And at the height of a cycle, P/E valuations fall. I just can’t help seeing the current Rio Tinto share price as being too low, though. Commodities prices remains strong, and forecasts show that strength continuing into 2023. On the back of that, I see further resilience in Rio Tinto’s earnings prospects.

FTSE 100 finance

FTSE 100 insurance firms look good value to me now, and I’m drawn to Legal & General (LSE: LGEN) on a P/E of less than eight.

On top of that low valuation, forecasts put this year’s dividend yield at 6.4%, when the FTSE 100 is expected to deliver around 4% overall. That looks attractive to me, but I want more than a high yield today. I also want to see decent cover by earnings, and a record of progressive rises.

I see both at Legal & General. Dividends have been growing slowly but surely over the past five years. And cover has been strong, coming in at 1.85 times last year.

The main downside I see is uncertainty and volatility over the coming 12 months. Inflation and economic troubles often send shivers through the financial sector. And, yes, war too.

But I do like LGEN’s investment management business. I’d buy on the strength of today’s low valuation and high dividend expectations.

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.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »