I have about £1,890 sitting in my Stocks and Shares ISA that I’m looking to invest. I’ve been looking for the best value shares to buy and these popular picks from the FTSE 100 have grabbed my attention.
Both trade on rock-bottom price-to-earnings (P/E) and/or price-to-earnings growth (PEG) ratios. But are they bargain buys at current prices or just investment traps?
Barclays
Higher interest rates have supported the share prices of high street banks like Barclays (LSE:BARC). Rate hikes from the Bank of England (BoE) feed through to bigger sector profits by widening the rates banks offer to borrowers and to savers.
The market expects policy makers to continue raising the benchmark in the coming months. Consensus suggests another 0.25% to 0.5% increase from current levels of 4%. This is clearly a good sign for Barclays et al.
But news coming from the BoE suggests that Britain’s banks and their investors may be disappointed. You see, weak economic conditions mean rate-setters may be reluctant to raise rates and keep them high for longer.
BoE deputy governor Huw Pill recently told Times Radio that the institution needs to be careful not to do “too much.”
And following last week’s latest rate rise, Bank official Silvana Tenreyro told MPs that “rates are too high right now.” She even speculated that cuts could be coming down the line.
Investing in banks is dangerous business during economic downturns. Bad loans can spiral out of control (Barclays has set aside £722m to cover credit impairments, more than half of which was accrued in quarter three). And signs from key people that interest rates could be lower than the market expects adds another extra layer of risk I’m not comfortable with.
So I’ll leave Barclays shares on the shelf despite its low P/E ratio of 5.7 times for 2022.
International Consolidated Airlines Group
The cost-of-living crisis makes it difficult to assess how strong airline ticket demand will be this year. Expensive discretionary items like holidays are the first to fall when consumers feel the pinch. Business travel also tends to decline during tough economic periods.
Yet despite these pressures, the travel sector continues to strengthen. This suggests that International Consolidated Airlines Group (LSE:IAG) could be a wise investment for me.
Latest passenger data from Heathrow — a key hub for the British Airways owner — showed a whopping 5.4m passengers pass through the airport in January. This was the highest level since the Covid-19 crisis began two years ago.
Pleasingly, IAG’s share price trades on a PEG ratio of just 0.1. So buying the business won’t break the bank for me.
But the company’s huge net debts (which sat north of €11bn in September) continue to sap my appetite for its shares. It leaves big question marks over the levels of future dividends. It could also leave the business having to desperately raise cash if trading conditions become tough again.
I’m also concerned about the wafer-thin profit margins that IAG operates on. Its ability to improve this by hiking ticket prices is limited given the highly competitive marketplace it operates in. And the problem is made worse in periods of high inflation like today. I think buying other value stocks could be a better way to make solid returns.
