2 dirt cheap FTSE 100 shares I’d avoid like the plague in June!

These FTSE shares look like classic investor traps, according to our writer Royston Wild. Here’s why he plans to avoid them despite their low valuations.

| More on:
Young Black woman looking concerned while in front of her laptop

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 think these ultra-cheap FTSE 100 stocks could cost investors a fortune over the long term. Here’s why.

The bank

I’ve long had reservations about buying UK-focused banks like Barclays (LSE:BARC). And following their share price surges this year, I’m even more reluctant to invest.

Barclays is up an impressive 39% in the year to date. And yet the company still faces many of the significant problems it did at the start of the year.

Interest rates are tipped to reverse in the coming months, with the first step perhaps coming later in June. This would put added pressure on banks’ net interest margins (NIM), which are already receding following the end of Bank of England monetary tightening.

At Barclays, the NIM dropped to 3.09% during the first quarter from 3.18% a year earlier.

Margins are also under pressure as competition in the banking industry heats up. The scale of the battle was underlined by Monzo’s stunning full-year release of earlier this week. It showed revenues more than double in financial 2023-2024, to £880m, while customer numbers leapt 31% to 9.7m.

With some challengers including Monzo tipped to turbocharge fundraising with IPOs in the near future, attempts by traditional high street banks to grow (or even retain) customers will get tougher.

My final concern for Barclays is that Britain’s economy is in danger of a prolonged period of weak growth. It’s a danger to UK-focused cyclical shares across the London stock market.

Barclays shares are undeniably cheap on paper. A forward price-to-earnings (P/E) ratio of 6.7 times makes it one of the FTSE 100’s cheapest banks.

However, this reflects the significant problems it must overcome to grow profits in the short-term and beyond. On the plus side, impressive cost-cutting is helping to improve its bottom line (operating costs dropped 3% in Q1). But this represents nothing more than a sticking plaster, in my opinion.

The oilie

Fossil fuel giant BP (LSE:BP) is another FTSE 100 stock I’m keen to avoid this month. I think there’s a high danger of it delivering disappointing profits in the near term and beyond.

This is indicated by the company’s ultra-low P/E ratio of 7.2 times.

BP’s earnings are closely correlated to the value of the commodity it drills for. And Brent oil prices — which recently dropped to multi-month lows below $80 a barrel — are in danger of further falls on worrying supply and demand signals. Latest US inventory data showed an unexpected supply rise in the past seven days.

It’s quite possible that prices will recover later in 2024, providing a boost to BP’s bottom line. Fresh OPEC+ production curbs could come in to support energy values. A raft of interest rate cuts are also tipped that would help prices.

But oil majors like this still face an increasingly tough time as renewables steadily take over. And BP hasn’t helped its long-term outlook by scaling back plans to reduce fossil fuel investment and production.

Oil and gas production will now drop by 25% by 2030, down from a previous target of 40%. This leaves a big question over how it will generate future profits as the fight against climate change intensifies.

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 Barclays 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

Investing Articles

Should I buy more Rolls-Royce shares near 500p?

This investor is wondering whether to buy more Rolls-Royce shares this summer or to just stick with those he already…

Read more »

Investing Articles

After its big fall, is the National Grid share price dirt cheap now?

The National Grid share price fell sharply in reponse to new rights issue plans. But is it an even better…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Starting in June, I’d invest £1,000 a month to aim for a £102,000 second income in retirement

This author highlights a less well-known FTSE 100 stock that could help his portfolio generate a very big second income…

Read more »

Investing Articles

Down 47% in 5 years, is the IAG share price due a bounce?

Many companies in the travel sector have seen fierce rallies since 2020. But with the IAG share price still down…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

Despite its drop, I reckon this is one of the best FTSE 100 stocks to buy and hold!

The FTSE 100 has been climbing in 2024 but this favourite of our writer's has been falling. Despite this, she’s…

Read more »

Investing Articles

AI stocks vs EV shares; which is the best sector for me to invest in?

Jon Smith considers the recent rally in AI stocks and weighs up whether to allocate more money there versus EV…

Read more »

A graph made of neon tubes in a room
Investing Articles

Do Greggs shares have even more growth ahead?

Greggs shares have seen some solid growth in the last few months, as the economy shows positive signs. But is…

Read more »

Investing For Beginners

How I’d aim to grow my Stocks & Shares ISA from £20k to £1m

Jon Smith explains how diversification and focusing on sectors for the future can help grow his Stocks and Shares ISA.

Read more »