I’m searching the FTSE 100 for the best beaten-down stocks to buy next year. More specifically, I’m on the hunt for cheap shares that could rebound strongly next year.
Both NatWest Group (LSE:NWG) and Glencore (LSE:GLEN) have grabbed my attention with their rock-bottom valuations. Both companies trade on price-to-earnings (P/E) ratios below the broader average of 12 times for FTSE shares.
What’s more, they also carry dividend yields way above the index’s 3.9% average. This means they might be great picks for near-term passive income.
But which would be the better buy for 2024?
The miner
Commodities producers such as Glencore have sank due to an uncertain outlook for raw materials demand. A spluttering Chinese economy, combined with a steady flow of interest rates hikes from global central banks, have weighed on investor confidence and pulled share prices lower.
This weakness means Glencore’s share price trades on a P/E ratio of 10.2 times for 2024. The miner also carries a 4.8% dividend yield. Next year’s predicted dividend looks quite achievable, too. It’s covered 2 times over by predicted earnings.
I’m not ruling out a sharp share price rebound for mining stocks in 2025. Additional fiscal and monetary support in China could help support industrial metals demand. A sharp unwinding of recent central bank rate hikes would also improve investor sentiment towards these stocks.
But at the moment things look tough. Fresh deflationary data from China this week underlines the challenges facing the country’s commodities-hungry economy.
The bank
Retail banks like NatWest provide essential financial products such as current and savings accounts, general insurance and credit cards. This gives them better earnings visibility than many other UK shares and, as a consequence, the means and the confidence to regularly pay above-average dividends.
City brokers expect this run to continue. For next year NatWest shares carry a huge 7.7% dividend yield. And current dividend forecasts look quite achievable. They’re covered 2.4 times by anticipated earnings.
Combined with a P/E ratio of 5.5 times, the bank looks very attractive on paper.
Yet despite the pull of big dividends I have doubts about buying NatWest shares. The benefit of large cash payouts could be more than offset by another year of thumping share price weakness.
Like mining stocks, banks are extremely sensitive to broader economic conditions. And a worrying outlook for the British economy raises the possibility of more poor loan growth and soaring impairments. Shock news that UK GDP shrank 0.3% in October underlines the growing risk to the cyclical retail banks.
Third-quarter bad loans at NatWest rose to £229m from £153m in the second quarter, latest financials showed. The bank has also trimmed its net interest margin (NIM) forecasts for 2023 as competition mounts and the Bank of England stops hiking rates.
The verdict
Both of these FTSE 100 stocks could experience fresh trouble in 2024 then. So which would be the better stock to buy?
As a long-term investor I think Glencore would be the superior investment today. The world looks set to embark on a fresh commodities supercycle as the green economy and technological revolution click through the gears. This means I expect the miner’s share price to soar from current levels.
I’ll be looking to buy Glencore shares at the next opportunity.
