2 cheap FTSE 100 shares I’m avoiding like the plague!

These highly popular FTSE 100 value shares trade on low earnings multiples. But I wouldn’t invest a single penny of my cash in them.

| 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.

Middle-aged white man pulling an aggrieved face while looking at a screen

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.

Recent volatility on financial markets means many UK blue-chip shares trade well below value. The FTSE 100 alone is packed full of brilliant bargain shares following falls in March.

As investors it can be sometimes tricky to separate truly terrific cheap stocks from value traps. Some shares trade at low cost owing to their high risk profiles.

With this in mind, here are two FTSE index shares I’m avoiding right now.

Lloyds Banking Group

Forward P/E ratio: 6.4 times

Dividend yield: 5.6%

I’ve long taken a dim view on UK-focused banks such as Lloyds Banking Group (LSE:LLOY). The domestic economy is tipped for a prolonged period of weak growth due to significant structural issues. These include problems like low productivity and post-Brexit trade frictions.

It seems the market shares my pessimism, too. This is why the Lloyds share price (like those of Barclays and NatWest) trade on lower price-to-earnings (P/E) ratios than emerging market-led operators HSBC and Standard Chartered.

I think British banks may struggle to grow profits and dividends over the long term. And their troubles will likely be worsened by interest rates returning to the levels of the 2010s.

The International Monetary Fund says that the recent rise in Bank of England rates will prove “temporary”. It reckons borrowing costs will retrace to pre-pandemic levels once inflationary pressures ease.

The lower interest rates are, the smaller the margin between the interest banks charge borrowers and offer to savers. This can be a significant drag on bank profits and explains why Lloyds’ share price remained weak following the 2008/09 financial crisis.

I like the steps the bank is taking to boost profits through steady cost-cutting. I also I think its huge exposure to the housing market will pay off handsomely over the long term as home demand grows. The company has long been Britain’s biggest mortgage provider.

But on balance I believe buying Lloyds shares is a risk too far.


Forward P/E ratio: 12.5 times

Dividend yield: 4%

Historically, Tesco (LSE:TSCO) has been seen as a rock-solid share for UK investors. Food retail is one of the most stable sectors out there. And this particular operator sits at the top of the tree.

This is thanks in part to the firm’s long-running Clubcard loyalty scheme. It ensures a steady flow of customers through its doors and its website. And it could remain a big money spinner for the business.

Yet I won’t be buying Tesco shares due to intensifying competitive pressures it faces. Amazon is eating into its online business, while store expansion at Aldi and Lidl is sapping store revenues.

Of course the company’s traditional rivals are also ramping up the attack to steal customers. Today Sainsbury’s, for example, announced plans to offer lower prices on many products for members of its own Nectar loyalty scheme.

If this proves as popular as the similar Clubcard Prices programme, Tesco might have another big problem on its hands. It has the potential to heap even further pressure on its rival’s wafer-thin profit margins.

The company trades comfortably below the average forward P/E ratio of 14 times for FTSE 100 shares. But even at these cheap prices Im not tempted to buy Tesco shares.

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.

HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Amazon.com, Barclays Plc, HSBC Holdings, J Sainsbury Plc, Lloyds Banking Group Plc, Standard Chartered Plc, and Tesco 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

Here’s how I’d aim for a ton of passive income from £20k in an ISA

To get the best passive income from an ISA, I think we need to balance risk with the potential rewards.…

Read more »

Abstract bull climbing indicators on stock chart
Investing Articles

2 FTSE 100 stocks I’d buy as the blue-chip index hits record highs

This Fool takes a look at a pair of quality FTSE 100 stocks that appear well-positioned for future gains, despite…

Read more »

Satellite on planet background
Small-Cap Shares

Here’s why AIM stock Filtronic is up 44% today

The share price of AIM stock Filtronic has surged on the back of some big news in relation to its…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

At a record high, there can still be bargain FTSE 100 shares to buy!

The FTSE 100 closed at a new all-time high this week. Our writer explains why there might still be bargain…

Read more »

Asian man looking concerned while studying paperwork at his desk in an office
Investing Articles

After profits plunge 28%, should investors consider buying Lloyds shares?

Lloyds has seen its shares wobble following the release of its latest results. But is this a chance for investors…

Read more »

Abstract bull climbing indicators on stock chart
Investing Articles

Something’s changed in a good way for Reckitt in Q1, and the share price may be about to take off

With the Reckitt share price near 4,475p, is this a no-brainer stock? This long-time Fool takes a closer look at…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

This new boost in assets might just get the abrdn share price moving again

The abrdn share price has lost half its value in the past five years. But with investor confidence returning, are…

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

As revenues rise 8%, is the Croda International share price set to bounce back?

The latest update from Croda International indicates that sales are starting to recover from the end of 2023, so is…

Read more »