Why this dirt-cheap FTSE 100 stock could outperform in a recession

This FTSE 100 energy company is as cheap as chips and should continue to take market share from its competitors as the UK enters a recession.

| 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.

Hand of person putting wood cube block with word VALUE on wooden table

Image source: Getty Images

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.

As recession looms here in the UK, it seems I have few places to hide as an investor. While many panic as news gets worse, I remind myself that time in the market beats timing the market. Therefore, I will continue to invest in good quality companies as their share prices become increasingly attractive. With this in mind, one FTSE 100 stock that has caught my eye recently is Centrica (LSE: CNA). This integrated energy company has been taking over competitors and streamlining its business. The stock has risen 18% year to date and should remain strong in the face of the current economic turmoil.

Boring is better

In times of market madness, the most boring stocks often outperform. Centrica has certainly proved that. The company is simple to understand – it supplies energy services to homes and businesses in the UK (mainly through British Gas) and Ireland (through Bord Gais Energy). This accounts for the majority of the company’s revenue.

On top of this, the company owns Hive, a technology solutions business that sells energy appliances such as electric vehicle charging ports. Centrica is also involved in renewable energy projects (solar farms). Both of these segments account for a smaller portion of total revenue.

Over the past year, there has been severe disruption in the energy supply industry. Several companies have filed for bankruptcy as oil and gas prices soar, squeezing their profit margins. Centrica’s ability to survive through this period shows its resilience, which should benefit the company in the medium term.

The company has benefitted from this market weakness, taking on the customers of bankrupt energy supplier People’s Energy and acquiring Nabuh in recent years. This has increased its market share in the UK. Centrica is also actively disposing of exploration assets to pay down debt and strengthen its balance sheet.

Cash is king

Analysts have predicted the company will remain cash flow positive over the next two years. It currently has a 12-month forward free cash flow yield of 14%. Valued at a five times price-to-earnings ratio, the company is at its lowest valuation ever — even cheaper than 2008, at the peak of the great financial crisis.

One significant risk to the business is the recent windfall taxes mentioned by many politicians, as this would reduce net profits for Centrica. However, with several companies filing for bankruptcy in the energy services industry, I believe a windfall tax would be counterproductive. Further bankruptcies could lead to monopoly status for the few survivors (Centrica is likely to be one of them), creating further price pressure as the survivors control the market.

Overall, Centrica operates in a staple industry, is gaining market share, and improving its balance sheet. It’s currently priced at a very low valuation, meaning any positive news is likely to boost the share price and is a great addition to my portfolio for the uncertainty that lies ahead.

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.

Peter McMullan owns shares in Centrica. 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

Up 670% in 2 years! This former penny share is skyrocketing on SpaceX contracts

Shares of Filtronic (LON:FTC) were soaring to multi-year highs today after another contract win with SpaceX. Should I buy this…

Read more »

Investing Articles

Why is the Greatland Gold (GGP) share price up 10% today?

Our writer looks at the reasons why the Greatland Gold (GGP) share price is the AIM 100’s best performer today.

Read more »

Passive income text with pin graph chart on business table
Investing Articles

What do I need for a passive income of £100k a year?

How much would I need to invest to collect a very healthy yearly passive income on my retirement? Surprisingly, the…

Read more »

US Stock

£2k invested in Nvidia stock 2 years ago is now worth this boggling amount…

Jon Smith details how much unrealised profit an investor would have from buying Nvidia stock but is cautious about what…

Read more »

Investing Articles

2 value stocks that still look cheap despite the FTSE rally!

Harvey Jones picks out two UK value stocks that still look nicely priced even as the UK index climbs. He…

Read more »

Dividend Shares

I asked ChatGPT to build the perfect passive income portfolio and here’s the result

Jon Smith turns to the world of AI to try and find out whether ChatGPT could build an investor a…

Read more »

Investing Articles

£20,000 to invest? Here’s how the FTSE 100 could deliver a £2,040 passive income

Here are two ways that investors with a lump sum to spend could target a large passive income with FTSE…

Read more »

Runner standing at the starting point with 2025 year for starting in new year 2025 to achieve business planing and success concept.
Investing Articles

Here’s how someone could start investing in 2025 with just £1,000

Planning to start investing in 2025? This writer highlights two very different stocks that might be worth considering for a…

Read more »