These are the 3 cheapest FTSE 100 stocks. Are they buys for 2023?

These FTSE 100 stocks boast bargain basement valuations, but are they worth buying for the year ahead? Roland Head investigates.

| 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.

Young happy people looking at sparklers in their hands on New Year's Eve

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.

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.

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.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays Plc. 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

A 9.6% yield but down 14%! Should I consider this FTSE gem for my dividend portfolio?

There are several things to consider when looking for FTSE shares with dividend potential. Here, our writer outlines his evaluation…

Read more »

Young Asian man shopping in a supermarket
Investing Articles

I’d shun Lloyds Banking Group and consider this stock for passive income instead

This company's dividend record knocks spots off Lloyds Banking Group's, and it looks like decent value now with a yield…

Read more »

Investing Articles

Will the 5.6% BT Group dividend yield grow in 2024?

Zaven Boyrazian explores whether BT Group can continue hiking its dividend and if the telecoms giant belongs in his income…

Read more »

Investing Articles

FTSE 100’s near a 52-week high, but this stock’s still dirt cheap!

The FTSE 100's on the rise, but not all stocks have been so fortunate. Here’s one company that got left…

Read more »

Investing Articles

Is this ‘secret weapon’ a multi-billion pound reason to buy Lloyds shares?

Dr James Fox explains how Lloyds shares could rise even higher as the bank's 'strategic hedge' is likely to boost…

Read more »

Smiling senior white man talking through telephone while using laptop at desk.
Investing Articles

3 of the best penny stocks for growth, dividends, and value!

Looking for top penny stocks to buy? Royston Wild believes these UK small-cap shares could prove lucrative investments in the…

Read more »

Investing Articles

How I’d aim to turn an empty ISA into £275k by purchasing cheap shares this summer

Harvey Jones is taking advantage of the summer stock market lull to buy cheap shares and build a high and…

Read more »

Investing Articles

What’s the minimum I need to invest every month to earn a meaningful passive income?

When looking to secure a stream of passive income it's important to be realistic. Our writer investigates a strategy to…

Read more »