Due to the extent of potential investment opportunities available within the UK market, I often find it useful to use a filter to scan all FTSE shares. This will allow me to quickly identify companies that meet my criteria, without wasting time on shares that don’t align with my investment objectives.
For that reason, I have decided to use the price-to-earnings (P/E) ratio of each company in the index, and compare this with their relative sector. My filter aims to highlight companies trading at the lowest 1% of P/E ratios within their respective sectors.
Redrow
The first company identified by my filter was Redrow (LSE: RDW), a residential housebuilder primarily operating throughout England and Wales. This company trades at a significant discount from pre-pandemic levels, down 52.9%.
Interestingly, the company’s reported earnings per share have increased considerably from the 2020 financial year. This increase in earnings, combined with significant falls in the share price, has resulted in the P/E ratio falling to almost a third of 2020 levels.
Redrow now has a P/E ratio of just 4.4. That’s below the sector average of six, and the lowest in the sector. The company also has several strong underlying fundamentals, with good cash generation, low debt, and a high dividend. This yield is now forecast to hit 8%.
Despite this, it’s important not to ignore the reasons why the share has fallen out of favour with the market. Given this company is a housebuilder, there are several sector-wide risks, such as reduced demand, and house price falls, both of which could cause the share price decline to continue.
Nonetheless, I believe my filter has highlighted a good opportunity, and therefore I would add Redrow to my portfolio.
Imperial Brands
The second company on my list is Imperial Brands (LSE: IMB), the fourth largest tobacco company in the world. It is currently trading with a P/E ratio of 7.7. This makes it the lowest in the sector, compared to the average of 9.
The company has performed fairly well over the last two years, rising 5.3% in 2021, and 16.8% so far in 2022. However, over a longer time horizon the company’s share price has declined significantly. It’s down almost 55% from its peak in 2016.
It’s fair to say that despite the clear discount opportunity, the underlying fundamentals are more of a mixed bag. Earnings have increased steadily over the last three years, and profit margins are strong. Furthermore, the company has a forecast yield of 7.5% and has consistently paid a dividend for 25 years.
On the other hand, debt levels are rising, and cash generation is well below the three-year average. Additionally, earnings are forecast to decline over the next year, with turnover expected to follow the same trend. This is less encouraging and leads me to question whether this truly is a value investment opportunity.
For that reason, despite being the cheapest in its sector, I would not be tempted to add Imperial Brands to my portfolio, since the negative underlying fundamentals outweigh the discounted share price, in my opinion.
