With the FTSE 100 on a price-to-earnings (P/E) ratio of only 11.5, it must be home to plenty of cheap stocks to buy now, right?
That valuation is well below the long-term average, and I think the answer is a clear ‘yes’.
These three companies in the top index should deliver updates in October, and what better time to take a look at them and consider buying?
Best in sector
I’d say Tesco (LSE: TSCO) has a strong safety margin. We can cut down on new clothes and holidays, but we have to eat. But the share price is still down 9% in the past five years, despite that.
H1 results should be with us on 4 October, so we can get an update on valuation then. But right now, forecasts put Tesco shares on a P/E of 12.5, dropping under 11 in the next two years.
That might not be screamingly cheap. But billionaire investor Warren Buffett reminds us that “it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price“.
The problems of high food inflation and squeezed margins could bring more pain yet. But I think Tesco’s valuation is very fair for one of our best companies.
Why so cheap?
Barclays (LSE: BARC) shares do look screamingly cheap on the face of it, and I genuinely don’t understand why.
We’re looking at a fairly modest 10% share price fall over five years. But profits have been growing, and that’s pushed the P/E down as low as five.
Barclays does faces general financial fears. There’ll be some bad debt provisions this year, for sure. Still, Q3 results, due on 24 October, should hopefully give us some clue.
I guess exposure to US banking must add to the gloom. Some US banks, under weaker regulation than over here, look a bit shaky. And big headlines have been touting a new US stock market crash.
But on that valuation, and with a 4.8% dividend yield, Barclays shares look cheap to me.
Set to fly?
International Consolidated Airlines‘ (LSE: IAG) shares are also on a P/E of five. And its shares are down a huge 78% in five years.
Q3 figures are due on 27 October, with forecasts suggesting a flat but decent year. But debt is the big problem. Net debt, which ballooned during the pandemic, was up at €7.6bn at the halfway stage.
Still, even if I allow for that, I calculate an adjusted P/E of about 10, which might still be fair by FTSE 100 standards. And further debt progress in the next couple of years could start to make the shares look very cheap.
People getting back to flying, fuel price risk, economic and political unrest… they all cast a cloud over the airline business. But I think it’s well worth watching.
Some other top FTSE 100 companies will report in October too, including builders and another couple of banks. If the inflation outlook brightens, I wonder if it might even be a turnaround month.