These 2 cheap shares dived last week. I’d buy 1 today

Although global stock markets rebounded hard this week, these two cheap shares were left behind in this surge. But I think one offers deep value today.

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Last week was pretty good to the UK’s FTSE 100. The blue-chip index rose by almost 2.7% over five trading days — one of its best weeks since early April. But not all Footsie shares did well last week, because this particular rising tide didn’t lift all boats. So today I went looking in the FTSE 100 for cheap shares that lost ground last week.

The FTSE 100’s winners and losers last week

Although the FTSE 100 added 2.7% last week, its constituents’ shares had widely dispersed returns — as I’d expect. Of 100 shares, 83 rose in value. These gains ranged from a mere 0.1% to a tidy 21.3%. The average rise across these gainers came to 5.8%. But it’s among last week’s losers that I’m searching for cheap shares.

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At the other end of the scale lie 17 shares that declined in value last week. These declines ranged from just 0.8% to a hefty 13.8%. The average decline across all those losers was 3.1%. That’s 5.8 percentage points behind the wider FTSE 100 index.

Finding cheap shares among the fallers

For the record, these two stocks were among the three worst-performing FTSE 100 shares last week (#98 and #99 respectively).

CompanyUnited Utilities GroupSSE
Share price1,034.24p1,746.65p
One-week price change-9.0%-9.4%
12-month price change5.2%13.3%
Market value£7.1bn£18.7bn
Price/earnings ratio7.2
Earnings yield13.8%
Dividend yield4.2%4.9%
Dividend cover2.8
Figures based on Friday’s closing prices

As you can see, both shares dropped by at least 9% last week. And that’s largely because these companies — United Utilities Group and SSE (formerly Scottish and Southern Energy) — are energy utilities. On Thursday, Chancellor Rishi Sunak announced a 25% windfall tax on the excess profits of UK energy suppliers. As a result, shares in UK energy and oil & gas companies took a beating. But do either of these shares look cheap to me today?

I’d buy SSE today for its dividend yield

As regulated utilities, these companies’ earnings and profitability are strictly regulated by Ofgem, the UK’s independent Office of Gas and Electricity Markets. Although this restricts their business models and so on, it also means that both companies have reliable (and steadily rising) revenues.

As a veteran value investor, I’m more drawn to SSE’s shares than those of United Utilities. Currently, SSE stock trades on a modest price-to-earnings ratio of 7.2 and a bumper earnings yield of 13.8%. What’s more, its dividend yield of 4.9% is at least a percentage point higher than the FTSE 100’s cash yield. To me, these fundamentals suggest that SSE might be the better bargain of these two cheap shares.

Energy suppliers could face tougher times

Recently, energy producers and utility companies have become easy targets for politicians. But what starts out as a one-off £5bn windfall tax might eventually evolve into a higher permanent tax burden for these businesses. This would be bad news for the future earnings and dividends of these companies. Even so, I like the look of SSE as a good fit for my family portfolio, so I’d still buy these cheap shares today for their passive income!

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Cliffdarcy 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.

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 considered, so you should consider taking independent financial advice.

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