The FTSE 100 and FTSE 250 are great places to look for undervalued or cheap stocks right now.
The indexes have been somewhat unpopular since the Brexit vote. This engendered a period of uncertainty that hasn’t really come to an end. But now, we’re also seeing additional pressures on the UK economy, including sky-high inflation and a tight labour market.
Despite my owns concerns about the UK economy this year, I think many UK-listed stocks will continue to perform. For one, ‘only’ about a quarter of FTSE 100 sales are linked to the UK economy.
Today I’m looking at some of the cheapest UK-listed shares by the price-to-earnings (P/E) metric.
Distressed shares
The UK-listed companies with the lowest P/E ratios are distressed stocks. These are risky investments.
Polymetal is an Anglo-Russian mining stock. Its share price has been hammered since Russia invaded Ukraine and it was recently relegated from the FTSE 100. The gold miner had a stellar 2021, and as a result, it now has a P/E ratio of just 1.2.
Ferrexpo is another stock impacted by the war. The Ukraine-focused iron-ore miner has a P/E ratio of 0.98. Some 70% of Ferrexpo’s mines are in Ukraine.
Cyclical industries
Stocks in cyclical industries such as mining and oil often have lower P/E ratios, especially when they are doing well. This is because these stocks tend to do well when economies are hot, but not so well when economies slow down.
Mining giant Rio Tinto is currently trading with a P/E ratio of 4.4. The Anglo-Australian multinational is the world’s second largest mining company. Its share price has fallen in recent months after global commodity prices showed signs of weakening.
With more Chinese Covid-related lockdowns likely, and negative economic forecasts in the West, the near-term prospects for these stocks don’t look great. However, I think we’re entering a longer-term period of scarcity whereby commodity prices will be higher for longer.
Riskier investments
Some stocks are just deemed riskier despite having positive fundamentals.
The Bank of Georgia and its peer TBC Bank are examples of this. These are the two largest banks in a fast developing economy, but investors are cautious here, probably because they’re not overly familiar with the Georgian economy.
The Bank of Georgia has a P/E ratio of 3.8 and TBC Bank has a P/E ratio of three.
Unpopular stocks
Some companies just aren’t that popular with investors. Let’s take Lloyds and Barclays. The former has a P/E ratio of 5.6 and the latter has a P/E ratio of 4.05.
Investors that aren’t overly optimistic about the British economy are likely to avoid these stocks. However, that’s not me.
Lloyds is heavily weighted towards the UK property market. And in the long run, I like that. Demand has consistently outstripped the supply of homes in the UK.
Credit Suisse recently set a target price of 245p for Barclays.
My strategy
The P/E ratio isn’t the only metric, but it helps me when deciding which shares to add to my portfolio. I’ve bought many of the shares listed above and will hold them as part of my long-term strategy.
