If I had to choose three FTSE 100 shares I thought looked seriously undervalued right now, based on fundamentals, which would they be? I’m going to try to answer that question without including any I already own, like Lloyds Banking Group.
Rio Tinto (LSE: RIO) is on a whopping forecast dividend yield of 10% and price-to-earnings (P/E) ratio of under five. The shares have dropped in the past year, but are well ahead of the FTSE over five years.
The metals and minerals business is cyclical. When mining stocks are near the top of a cycle, P/E multiples often look very low, in anticipation of a few years of falling earnings. Similarly, dividend yields can look very high.
As it happens, Rio Tinto has just cut its interim dividend by 29%. It was, though, still its second biggest interim dividend, after last year’s.
Is the industry set for a down cycle? If so, Rio Tinto shares could decline and dividends could be pared further. And we don’t know how much the Chinese economy will suffer.
I’m watching Rio Tinto, and I think it could be one to snap up on future share price weakness.
Housing
The housebuilding industry is also cyclical. And the Taylor Wimpey (LSE: TW) share price has fallen a lot quicker and further than I’d expected.
So far, housebuilders have all reported a strong first half to the year. But we’re still in early days regarding the 2022 economic outlook. So maybe we’ll see a property slowdown.
Many investors appear to think that builders need rising house prices to make profits. And they act as if falling prices will lose them money, and sell the shares.
But I feel more confident. Taylor Wimpey was making good profits years ago when house prices were lower. So why wouldn’t it do the same should they drop again? It’s all about the difference between selling prices and build costs. And a fair bit of the latter is down to land prices, which also fall during property weakness.
Forecasts suggest a P/E of under six, and a 9% dividend yield. There could be short-term trouble ahead, but I see a long-term buy.
Banking
I said I won’t pick Lloyds, but I can’t resist choosing a bank. So I’m going for Barclays (LSE: BARC), which has an advantage. Lloyds is wholly domestic, and dependent a lot on UK mortgage lending.
But Barclays is still international in its outlook, and has stuck with its investment banking business. And that should help protect it from UK economic troubles. Admittedly, economic woes aren’t restricted to these shores. But at least it’s diversification.
Barclays shares are down, but that puts them on a tasty valuation, in my eyes.
We’re looking at a forecast P/E of a little over six for this year, and falling. The predicted dividend yield is modest, at about 4.5%, but it rises for subsequent years.
I fully expect the economy to pick up again. And I just can’t see a strong long-term economic scenario in which banks aren’t doing well.
Barclays is another where I see a likelihood of short-term pain but long-term gain.
