2 FTSE 100 stocks I’ll avoid like the plague in April!

These FTSE 100 stocks have been firm favourites with UK and foreign investors for years. But our writer thinks they could prove to be expensive traps.

| More on:
Middle-aged white man pulling an aggrieved face while looking at a screen

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.

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.

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.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco P.l.c., Ocado Group Plc, and Tesco Plc. 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

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

Investing freedom — but inside a pension

Strapped consumers might be cutting back on investing, but they’re still keeping up their pension contributions. The only problem? A…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

Forget gold! I’d rather buy these 3 FTSE high-yielders in a Stocks and Shares ISA

Gold looks like a risky investment to me as the price hits an all-time high. I'm ignoring the fuss to…

Read more »

Young female business analyst looking at a graph chart while working from home
Growth Shares

This 55p UK stock could rise more than 300%, according to a City broker

This UK stock has fallen from above 800p to below 60p. But analysts at Citi believe it’s capable of a…

Read more »

Businesswoman analyses profitability of working company with digital virtual screen
Investing Articles

I think this FTSE 250 trust has all the right ingredients to lock in long-term profits

Today I'm examining the prospects of a private equity investment trust on the FTSE 250 that caught my attention recently…

Read more »

Young black man looking at phone while on the London Overground
Investing Articles

2 under-the-radar UK shares investors should consider snapping up

Two UK shares have caught the eye of our writer. She explains why investors should be taking a closer look…

Read more »

Investing Articles

Are these 2 ultra-high-yielding income stocks a good buy for me?

These two income stocks often split the debate amongst investors. So what does our writer think of them as potential…

Read more »

Senior woman potting plant in garden at home
Investing Articles

5% yield! This dividend stock could be great for my retirement

Our writer explains why this dividend stock appeals to her as she’s investing to build wealth to enjoy in the…

Read more »

A young Asian woman holding up her index finger
Investing Articles

I’d aim for a second income of £1,000 a month with this super-reliable dividend stock

I think a great way to build a second income stream is by investing in dividend stocks via a Stocks…

Read more »