Warren Buffett hates paying over the odds for stocks. The billionaire investor says a bad entry point can undo “a decade’s worth of stock market returns”. I’m inclined to agree. And doing the opposite – finding undervalued stocks – can be the ticket to excellent stock market gains. Here are two bargain FTSE 100 stocks I think fit the bill.
Cigarettes and vapes
The first stock I’m looking at is British American Tobacco (LSE: BATS). I do own shares here, but I’m always open to buying more if the price is right, and I couldn’t ignore that the cigarette seller is down around 28% over the last year. It’s now near a 52-week low. Is it time to snap up more on the cheap?
The recent fall seems to have been a regulatory issue. The US is rumoured to want to take action against non-combustibles – vapes and e-cigarettes. These products make up 14% of the firm’s revenue, and that figure is expected to grow as the number of smokers declines.
Outside of this uncertainty, the stock looks extremely cheap. The company trades at around nine times earnings compared to 18 times in 2016. I could look at that as a half-price sale. I could also look at it as an obvious sign of an industry that’s in decline.
On that note, there are actually more smokers now in the world than ever. And this means many billions in sales for BAT to reward shareholders with. The dividend yield is one of the highest on the FTSE 100, at 8.64%. It’s anyone’s guess how long this will last though.
I’m happy to hold my shares here, but I don’t think there’s enough value for me to buy more.
Heading skywards?
The second stock that looks like a bit of a bargain right now is IAG (LSE: IAG). The airline has had a good run recently, up 51% in the last year, and it comes as little surprise. The end of Covid lockdowns has seen planes flying and passenger numbers getting back to normal.
But for IAG, the share price is miles away from previous highs. The shares cost £4.53 in January 2020, but now they’re down to only £1.63. If the industry is back on its feet, would it be worth opening a position here to take advantage?
The answer isn’t a simple one. Firstly, like a lot of firms, IAG built up a weighty debt pile to keep the lights on during Covid. A few extra billion on the balance sheet means more financing and makes it harder to fund new investments.
And even though the pandemic is, hopefully, done and dusted, the airline industry has new problems to worry about as well. Higher fuel costs are one, which cuts into margins and earnings. Also, a cost-of-living crisis means that there may be fewer passengers in the future.
All these problems mount up, and on balance, I’d say the price isn’t as cheap as it first appears. I think there are better UK stocks for me to invest in right now.
