I’m searching for the best, cheap FTSE 100 and FTSE 250 shares to buy following recent stock market turbulence. Are they brilliant bargains at current prices, or classic value traps?
easyJet
On the one hand, budget airlines like easyJet (LSE:EZJ) could be ideal stocks to buy in the current economic environment. Like retailers B&M, Card Factory and The Works, such companies can benefit when consumers feel the pinch and switch down to cheaper products.
So why is the easyJet share price retreating? In a nutshell, sellers of all non-essential goods face an uncertain future as interest rates rise and the economy cools. Luxury products like plane tickets and package holidays are among the first things on the chopping block during tough times too.
Soaring fuel prices is another threat to the FTSE 250 firm this year and beyond. Brent crude prices have soared to multi-month highs above $88 per barrel in recent sessions. And further gains could be coming as supply constraints continue.
Finally, as a potential investor, I’m also concerned by a potential clampdown on airlines’ add-on services. Possible changes here could significantly alter their long-term earnings potential.
Criticism of bloated charges for extras like additional baggage and seat selection is growing, and in early June, Prime Minister Rishi Sunak said the government is reviewing the practice of ‘drip-pricing’ to boost transparency for consumers.
easyJet made ancillary revenues of £622m between April and June. This represented more than a quarter of group turnover (26%), a figure which illustrates the importance of this part of the business.
Right now, easyJet’s share price trades on a forward price-to-earnings (P/E) ratio of 8.8 times. But even this rock-bottom multiple isn’t enough to tempt me to invest.
Aviva
Instead, I’d prefer to use any spare cash I have to buy Aviva (LSE:AV) shares.
Having sunk to 52-week lows, the FTSE 100 firm now trades on a forward-looking P/E ratio of 9.1 times. What’s more, the financial services firm offers up a market-beating 8.7% dividend yield.
Like easyJet, the company could struggle to increase revenues in the current economic climate. Okay, sales of general insurance tend to remain robust even during downturns. But demand for life insurance, retirement and wealth products usually slumps as people scale back spending.
But I’m tempted to buy Aviva shares on account of its bright long-term outlook. Britain’s rapidly ageing population, combined with rising fears over the future of the State Pension, could vitalise sales across its broad product suite.
Recent restructuring provides the company with a better chance to exploit this opportunity too. The sale of overseas assets gives it added financial clout to exploit growth possibilities. On top of this, the slimmed-down business can also now focus on exploiting its core UK, Ireland and Scandinavian markets more effectively.
A strong balance sheet and excellent cash generation also suggests Aviva will also keep returning tonnes of surplus capital to its shareholders. It completed another share buyback programme worth £300m back in June.
