The price-to-earnings ratio (P/E) is a handy tool I use to get a feel for the relative value of a stock at a particular price. Usually, a high ratio means that a stock could be overvalued. The flipside is also true, that a low ratio could present me with an undervalued opportunity. With all of that in mind, here are two FTSE 100 stocks that have low ratios right now.
Banking on the basics
First up is Barclays (LSE:BARC) with a P/E of just 4.7. The share price has slumped in recent weeks following general banking sector concerns around stability. However, over a broader one-year period the stock is flat.
The fall of 16% in the past month pushed the share down to 52-week lows. But it appears that the worst of the selling has now finished.
To be clear, I don’t agree with the market-induced sell-off in big banks, particularly Barclays. The bank is diversified by generating revenue from a host of sources, ranging from retail customers to corporate clients and institutional funds. It has operations in 40 countries.
I’m very interested in picking up some Barclays shares over the coming month. I’m just waiting to see if there’s any further short-term weakness in the next week or so.
One risk I’m aware of is the trading division, which had a costly blunder worth several hundred million dollars in the last quarterly update. Senior leadership needs to get a grip on risk management when it comes to this area.
A surge in the energy space
With a P/E ratio of 5.12, Centrica (LSE:CNA) is also potentially undervalued. The stock has risen by 32% over the past year. In contrast to Barclays, Centrica shares recently touched 52-week highs.
Why has the business been doing so well? The company pointed to “strong gas production and energy generation against a backdrop of higher commodity prices and strong management of increased commodity volatility”.
To put this in perspective, the preliminary 2022 results showed an adjusted operating profit of £2,823m. This contrasts to the 2021 figure of £392m. The 2022 figure excludes the value of disposed Spirit Energy assets.
One concern I have is whether this kind of performance can be replicated going forward. I expect energy prices to come back under control, and could fall off sharply in certain situations (such as peace in Ukraine/easing tensions with Russia).
Yet given the performance last year, the company has good cash position that it can make use of for long-term growth via investments. This could provide a catalyst to grow market share in the future.
Ultimately, the stock does appear to be good value even with the recent jump. I’m considering adding it to my portfolio after Barclays when I have some more free cash.
