Demand for FTSE 100 stocks is heating up rapidly. I’m not surprised at this given the cheapness of many UK blue-chip shares compared with overseas stocks.
But there are certain Footsie companies I wouldn’t touch with a bargepole. Here are two I won’t be adding to my stocks portfolio this month.
Tesco
Amid an uncertain outlook for the UK economy, investing in food retailers and producers could be considered a good idea. Volumes at the likes of Tesco (LSE:TSCO) remain broadly unchanged at all points of the economic cycle.
But I’m staying clear of this ‘Big Four’ supermarket as competition in this famously cut-throat industry becomes ever tougher.
Established retailers like this are being left behind as their rivals double down on slashing prices. Kantar Worldpanel data shows that rival Ocado‘s sales rose 9.5% in the last 12 weeks thanks to a voucher-led sales campaign. This was well ahead of Tesco’s 5.8%.
The trouble is that Tesco needs to get down in the mud and keep aggressively cutting prices to support volumes. And even as it does this, the business still faces immense pressures as value-led Aldi and Lidl rapidly expand their store estates. It’s hard to see how the company can significantly improve its ultra-low profits margins (which stood at 4.4% on an adjusted basis in the six months to August).
Low margins leave profits highly sensitive to cost pressures, and significantly limit the chances of healthy earnings growth.
Today, Tesco shares trade on a forward price-to-earnings (P/E) ratio of 11.8 times. This is ahead of the FTSE’s average of 10.5 times, and a figure I find hard to justify given the grocer’s unappealing growth outlook.
British American Tobacco
I’m also happy to avoid British American Tobacco (LSE:BATS) shares, even though on paper they seem to offer spectacular value.
The tobacco titan trades on a forward P/E ratio of 6.5 times. And its corresponding dividend yield stands at a whopping 10%.
BATS’ low valuation reflects sinking market confidence in the cigarette industry as consumer tastes rapidly change. Its share price has fallen 26% since 2019, and I can’t envisage it breaking out of this downtrend.
Fans would argue that the non-combustible market offers a chance for the FTSE firm and its peers to turn things around. British American has certainly been making solid progress here — sales of its Vuse e-cigarette and similar products jumped 21% in 2023 (at stable exchange rates).
My fear is that demand for these next generation products could go the way of traditional combustible products as legislators tighten the net across the globe. The UK government, for instance, is currently preparing legislation this year to restrict vape flavours and packaging. This comes alongside plans to prevent children aged 15 and under from ever buying tobacco products.
Sure, British American Tobacco shares look cheap on paper. But there are many other FTSE 100 value stocks I’d rather buy today.
