Where can investors find the best FTSE 100 stocks to buy now? It’s easy to focus on a handful of the biggest Footsie stocks when hunting for bargains, but I think this is a missed opportunity.
My research suggests that some of the smaller members of the index currently offer the best value. Today, I want to look at two of these companies, including one I’ve already bought for my portfolio.
Why are ITV shares so cheap?
My first pick is ITV (LSE: ITV). Shares in the UK’s largest commercial broadcaster (home of Love Island, Tour de France, and Murder in Provence) have fallen by 40% over the last year.
Even the continued growth of the ITV Studios production business has not reassured investors. Studios generates about a quarter of ITV’s profits and helps to diversify income by selling to external customers like Sky and Netflix.
What’s upset investors are ITV’s plans to upgrade and expand its streaming services. In March, CEO Carolyn McCall revealed plans to spend an extra £230m on digital content and technical upgrades by the end of 2023.
That’s a lot of money, but I think it’s the right choice.
Many people watch all of their television on demand already. More will do so in the future. ITV channels currently have a 22% share of viewing in the UK. McCall needs to protect this share as viewing moves online.
The big risk is that this investment will fail to deliver the extra online revenue she is hoping for. If that happens — and ITV loses viewers to streaming platforms — there could be a problem.
However, this year’s share price slump has left ITV shares trading on a rock-bottom price to earnings ratio of five, with a dividend yield of 7.5%. That looks far too cheap to me, so I’ve bought ITV shares for my portfolio.
A homegrown FTSE 100 bargain?
When I buy shares, I hope to keep them for a long time. To help me succeed, I look for companies with a record of long-term growth. One business that’s been on my radar for several years is food and fashion group Associated British Foods (LSE: ABF).
This family-controlled business can trace its history back to 1935, when Garfield Weston founded Allied Bakeries. Today, ABF owns fashion and lifestyle retailer Primark, as well as a range of essential food and agriculture businesses.
ABF has had a tough few years. Primark doesn’t sell online and had to close its stores completely during the Covid lockdowns. More recently, soaring commodity prices have put pressure on profits in the group’s food businesses.
These are short-term problems however, and I’m confident ABF can continue to adapt and grow. Sales have bounced back strongly at Primark, which is also starting to experiment with some aspects of online trading, mostly click and collect.
Meanwhile, the group’s food businesses are adapting and putting up prices where necessary. City analysts expect ABF’s profits to reach £1bn this year — a level not seen since 2018.
ABF shares are currently trading on a forecast price/earnings ratio of 13, with a dividend yield of 2.7%. That’s cheaper than they’ve been for many years. Although the company still faces some challenges, I think this could be a good entry point for a new long-term investment.
