Recent volatility on the FTSE 100 means many blue-chip stocks look too cheap to miss. But before diving in investors need to take extra care. Some businesses trade at massive discounts for good reason.
Here are two FTSE index shares I’m avoiding at all costs.
Barclays
High street bank Barclays (LSE:BARC) offers excellent all-round value on paper. It trades on a forward price-to-earnings (P/E) ratio of 4.8 times and sports a 5.6% dividend yield for 2023.
Yet the prospect of soaring loan impairments means I’m staying away from the FTSE 100 firm. It set aside more than half a billion pounds worth of extra charges in the first quarter. I believe the number could keep soaring too as tough conditions in the UK and US likely continue.
Illustrating the scale of the problem, Citizens’ Advice said on Thursday that it helped record numbers of Brits between January to April due to issues like debt. As interest rates keep rising and high inflation persists, individuals will find it increasingly difficult to pay back their loans.
At the same time, banks like this might struggle to grow their loan books as consumers and businesses scale back on spending.
Barclays’ investment bank provides an advantage over other UK-focused banks like Lloyds and NatWest. If financial markets pick up profits here might soar. But on balance I’m happy to avoid the company’s shares.
Scottish Mortgage Investment Trust
The Scottish Mortgage Investment Trust (LSE:SMT) share price has kept plummeting. So right now it trades at a colossal discount to the value of its underlying assets.
Today the trust trades at 618.2p per share. This represents a massive discount from its net asset value (NAV) — which measures a fund’s total assets minus its liabilities — of 799.36p.
But trying to catch a falling knife is dangerous business. Calling the bottom for a particular share can be down to luck as much as judgment, and getting it wrong can be hugely expensive.
Someone who bought Scottish Mortgage shares at the start of 2023 might have been tempted by the company’s 47% share price decline the previous year. Yet it’s fallen a further 15% since then. And it’s difficult to see how the business will break out of this recent decline.
Worries over the robustness of tech sector earnings has rocked the trust’s share price since last summer. As interest rates keep rising, and patchy economic data from the US and China continues to flood in, concerns over the North American and Asian growth shares that Scottish Mortgage holds are unlikely to abate.
It’s quite possible that the FTSE firm will record spectacular profits growth over the long term. Tech specialisms like e-commerce, artificial intelligence (AI), and cybersecurity have plenty of scope to expand. And the trust has exposure to many companies that operate across these exciting growth areas and more.
But I remain concerned about some of the valuations of many of the businesses Scottish Mortgage holds. All things considered, I’d rather buy other value stocks today.
