The FTSE 100 has been edging closer to a new record high in recent weeks as US trade tariff fears subside. This has ignited a fresh wave of optimism buoyed up by lowering inflation and renewed hope for interest rate cuts.
Throughout May, the Footsie has been flirting with its record high of 8,900 points, driven by defence and aerospace stocks. The likes of Babcock International, BAE Systems and Rolls-Royce have enjoyed growth of between 50% and 80% this year.
But while the overall market may be doing well, not all stocks are participating equally in the rally.
Uncovering value in a bull market
Right now, certain FTSE 100 sectors — such as energy and mining — are being overlooked due to concerns around regulation, ESG pressure or simply a lack of excitement. Yet some of these firms continue to produce solid earnings and pay generous dividends.
To put it mildly, stock markets aren’t always rational.
During bull phases, attention tends to gravitate towards growth stories and trendy sectors. Meanwhile, reliable but unfashionable companies are left behind. This can create attractive entry points for investors willing to go against the grain.
With that in mind, here are two quality blue-chips that look undervalued right now.
The energy giant
BP (LSE: BP) is a good example of a stock with a price that looks too low. The oil and gas conglomerate trades on a forward price-to-earnings (P/E) ratio of just 9.1. Plus, it has a dividend yield of 6.7% that’s supported by strong cash flows.
It has a long history of prioritising shareholder returns with share buybacks, without compromising its capital allocation strategy. Although oil prices have softened since 2022, BP’s integrated model helps cushion volatility across the various stages of the supply chain.
Management is also pursuing a gradual transition towards renewable energy, although this remains a small part of its earnings. It faces political and regulatory challenges around fossil fuels, and the potential for a demand shock if global growth stalls. This could pose a risk to dividends if weakened revenues force a cut.
But for now, it shows promise as an undervalued stock with strong fundamentals. That’s why I think it’s worth considering for both income and value investors.
Essential minerals
Glencore (LSE: GLEN) offers broad exposure to essential commodities, from coal and copper to nickel and cobalt — all critical to global electrification and infrastructure.
Despite this strategic positioning, the shares remain inexpensive, with a five-year average forward P/E ratio of 11 and a P/E-to-growth (PEG) ratio well below 0.5. It uses its marketing division to generate reliable income even during commodity downturns, and has a capital-light model that allows it to return significant cash to shareholders.
Sadly, it was forced to cut dividends in 2022, from 40c to 13c per share — bringing the yield down to 2.7%. The same risks that led to the cut remain present: legal and ESG challenges tied to past conduct and profits that are sensitive to commodity price swings. The dividend still adds some value, but lacks a notable enough track record to be reliable.
Nevertheless, for investors seeking diversified resources exposure and strong cash generation, I think it’s worth considering while it’s trading below fair value.
