My top 10 cheap FTSE 100 stocks

I’ve been crunching some numbers to identify the 10 most undervalued FTSE 100 shares. But the key question is, are any of them worth me buying?

| More on:
Bournemouth at night with a fireworks display from the pier

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I’ve ranked all of the current members of the FTSE 100 — excluding investment trusts — using two popular valuation measures.

The first is the price-to-earnings ratio (P/E), the other is the price-to-book ratio (P/B). I’ve combined the two lists to come up with my top 10 cheap Footsie shares.

And the winner is …

Top spot goes to Vodafone (LSE:VOD) but its inclusion is a good example of why such metrics and company accounts can sometimes be misleading.

For the year ended 31 March 2023, it reported earnings per share (EPS) of 42.77 euro cents. But this included one-off gains of €9.3bn, following the disposal of some of the group’s operations.

Excluding these gives an adjusted EPS of 11.45 euro cents. Reflecting the lower figure would result in the stock falling three places on my list.

BT is currently fourth. And the inclusion of another telecoms stock helps illustrate a wider problem that’s affecting valuations in the sector.

The industry requires an enormous amount of investment but, due to intense competition and rising interest rates, earnings are not keeping pace.

To address the problem, Vodafone is currently undergoing a restructuring exercise that will see it exiting markets where the cost of financing its operations is higher than the returns generated. I expect most of these proceeds will be used to reduce its huge borrowings.

I already own shares in Vodafone so I’m watching the company’s turnaround plan with interest. But due to my exposure to the sector, I don’t want to include BT in my portfolio as well.

A balancing act

All five of the banking stocks in the index make the top 10 – NatWest Group (2nd), Barclays (3rd), Lloyds Banking Group and Standard Chartered (joint 5th), and HSBC (8th).

Although a higher interest rate environment is generally good for their revenue, it also increases the number of loan defaults.

Economists appear to agree that interest rates have now peaked — anticipated reductions will cause banking margins to shrink. But I believe the sector still offers good value. That’s why two of the stocks are in my ISA. However, at the moment, I don’t want any more exposure to the sector.

The others

Seventh place belongs to British American Tobacco. With its excellent track record of generous and reliable dividends, the stock’s popular with income investors. Of course, payouts are never guaranteed. The company is hugely cash generativ, which is helping fund its transition away from traditional tobacco products. But I have concerns that increased restrictions on new alternatives will harm its long-term prospects. I therefore don’t want to buy.

National Grid is ninth. It also pays healthy dividends. And its monopoly status in its key markets means it doesn’t have the problem of finding new customers. But the downside is that it’s regulated and is restricted on what it can charge. I rate the stock highly and it’s on my watchlist for when I next have some spare cash.

Tenth spot goes to Kingfisher, owner of B&Q. The company’s had a torrid time lately. In November 2023, it issued its second profits warning in two months. The business is struggling in France, which is weighing on its earnings and share price. It’s likely that all of the bad news is now out in the open but, until the picture becomes clearer, I’m not interested in investing.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. James Beard has positions in HSBC Holdings, Lloyds Banking Group Plc, and Vodafone Group Public. The Motley Fool UK has recommended Barclays Plc, British American Tobacco P.l.c., HSBC Holdings, Lloyds Banking Group Plc, Standard Chartered Plc, and Vodafone Group Public. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young Caucasian woman holding up four fingers
Investing Articles

7%+ dividend yields! 4 FTSE 100 shares for investors to consider buying in April

These FTSE shares offer dividend yields comfortably above the index average of 3.7%. Here's why they could be good passive…

Read more »

Dividend Shares

£10k in an ISA? Here’s how to generate a ton of passive income

Passive income can provide a lot more financial freedom and security. Here’s an easy way to generate some within an…

Read more »

Investing Articles

The Aviva dividend yield’s already over 7%. Could it go higher?

Christopher Ruane explains why he thinks the Aviva dividend could be on course to grow this year and beyond. Might…

Read more »

BUY AND HOLD spelled in letters on top of a pile of books. Alongside is a piggy bank in glasses. Buy and hold is a popular long term stock and shares strategy.
Investing Articles

2 shares I’d buy to try and double my money in 10 years

Stephen Wright thinks there are still opportunities to to buy UK shares that can double in value over the next…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

NIO stock has crashed! Here’s why I still wouldn’t touch it with a bargepole

I've been watching NIO stock falling heavily, and wondering when might be a good time to get in cheaply. Here's…

Read more »

Investing Articles

Why have Rolls-Royce shares fallen this week?

Rolls-Royce shares remain the best performing on the FTSE 100 over the past year, but there's been some pullback. Dr…

Read more »

Investing Articles

With a 4.3% yield, I consider this FTSE company an exceptional investment

Oliver Rodzianko say this FTSE company is focused on quality and long-term survival. As such, he thinks he'll hold it…

Read more »

Investing Articles

How I’d invest £10,000 in a Stocks & Shares ISA and aim for a £45,500 second income

Millions of us aren’t earning the second income we deserve. Here, Dr James Fox explains how he’d get his savings…

Read more »