I’m always on the lookout for cheap shares. There’s something deeply satisfying about picking up a FTSE 100 bargain at a reduced valuation, then watching it swing back into favour over time. It isn’t easy, though. A low share price doesn’t guarantee good value, or a barnstorming recovery. It takes careful stock picking and a bit of patience too.
Today’s stock market volatility is suddenly throwing up unexpected chances to buy companies I’ve had my eye on for a while.
Tesco’s nice share price
Grocery giant Tesco (LSE: TSCO) is one of them. It’s had a strong five-year run, enough for me to feel it had got a bit pricey. A 7.5% slide over the last week makes it more appealing, with a price-to-earnings ratio trimmed to 15.8. Tesco shares are still up 28% over 12 months, which shows how resilient the business has been.
The trailing yield has nudged up to 3.15%. It isn’t the highest, but looks sustainable to me. Tesco is still locked in a tough price war triggered by Asda, and profit margins are narrow at 3.9%, so it’s not without risk. If today’s economic problems tip into recession, shoppers may pull back even more. But the cheaper it gets, the more interesting it becomes. With a long-term view, naturally.
Private equity opportunity
Private equity and alternative asset specialist Intermediate Capital Group (LSE: ICG) has been on my watchlist for two years. This is a tricky period for private equity because high interest rates make borrowing more expensive, and wider uncertainty makes it harder to float or sell successful investments. Recent anxiety over the $4.5trn US shadow banking sector hasn’t helped sentiment.
The company has a long record of lifting dividends every year. Today, the trailing yield is 4.33% and the P/E sits at 12.2, which looks modest for a business with its pedigree. It operates in a volatile area and may not reach its potential until interest rates fall more decisively. Even so, I think investors with a long-term view could consider buying, especially at today’s lower valuation.
Hospitality struggles
Premier Inn owner Whitbread (LSE: WTB) is down 15% over the last month after reporting a 7% drop in interim pre-tax profits to £316m on 6 October. Revenue fell 2% to £1.5bn. Its German operations have struggled in a slowing economy, and stubborn UK inflation has also hit performance. This is a tough moment for UK hospitality as it deals with rising employer taxes and weaker consumer spending.
The shares have drifted for years and are down 6% over the last 12 months. With a P/E of 14.3, I had expected them to be cheaper. The yield sits at 3.5%. Of the three businesses I’ve looked at today, Whitbread feels the least tempting, although a sharper share price drop could change that.
There may be even better opportunities across the FTSE 100 as uncertainty shakes sentiment. I’m keeping my watchlist close, because this feels like one of those moments when long-term investors might find value where others see trouble.
