With the end of the year approaching fast, I’ve been scouring the FTSE 100 for bargain stocks to add to my portfolio for 2023.
Today I’m going to look at the three cheapest stocks in the index, based on 2023 earnings forecasts. With their low valuations, are these stocks too cheap to ignore?
#1: BP
Profits at energy giant BP (LSE: BP) surged by 160% to $22.9bn during the first nine months of this year, as energy prices soared. The company took advantage of its bumper cash flows to cut net debt by $10bn, to $22bn.
However, oil and gas prices have been drifting steadily lower since June. Petrol and diesel prices are also falling. Instead of worrying about supply shortages, the market is now worried about an economic slowdown.
Broker forecasts suggest that BP’s earnings will fall by 25% in 2023 and by a further 13% in 2024.
My view: BP shares may look cheap on a price-to-earnings (P/E) ratio of five. But the 4.5% dividend yield isn’t much higher than the market average and the stock trades at nearly twice its book value.
I think it’s also worth remembering that this is a low-growth commodity business that needs to invest in the energy transition. On balance, I think there are better opportunities elsewhere.
#2: Barclays
Rising interest rates have given UK bank profits a shot of adrenaline. Third-quarter profits at Barclays (LSE: BARC) rose by 10% to £1.5bn.
This figure would have been higher, except for a sharp increase in bad debt provisions. These are estimates of possible losses in the future. They aren’t actual losses. At least, not yet.
Barclays could obviously see an increase in bad debt if the UK suffers a recession next year. However, its CEO says there’s no sign of an increase in late payments yet.
One possibility I can see is that the banks like Barclays are taking a cautious approach to future losses, in order to distract attention from a sharp rise in underlying profits. This might help to discourage the government from applying a windfall tax.
My view: The stock currently trades at a 45% discount to book value, on a 2023 forecast P/E ratio of five. There’s also a forecast dividend yield of 5.8%. I think Barclays looks attractive and could be a decent buy for 2023.
#3: Centrica
Centrica (LSE: CNA) shares have risen by nearly 40% over the last year. Despite this, the owner of British Gas is still trading on a 2023 forecast P/E of just 5.2.
Like BP, Centrica has been benefiting from high oil and gas prices. In addition to its utility business, the group produces gas in the North Sea and has an energy trading operation. Profits at both of these units soared during the first half of this year.
Boss Chris O’Shea feels confident enough about the future to restart dividends payments. Shareholders are expected to receive a total dividend of 3p per share this year, giving a 3.2% yield.
My view: broker forecasts suggest Centrica’s profits will slip lower over the next couple of years. However, the group’s financial position is much stronger than it was and dividends are expected to continue rising. I think this utility stock looks reasonably priced at current levels.
