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3 Neil Woodford Low P/E Picks: BAE Systems plc, Rolls-Royce Holding PLC And Legal & General Group Plc

Are you looking for undervalued blue chips in this depressed market? Some of the lowest P/E picks among the biggest holdings of top fund manager Neil Woodford could be a good place to start.

Right now, Woodford favourites BAE Systems (LSE: BA), Rolls-Royce (LSE: RR) and Legal & General (LSE: LGEN) are all trading on 12-month forward P/Es below the FTSE 100 long-term average of 14.

Company Recent share price P/E
Rolls-Royce 651p 13.8
Legal & General 240p 11.9
BAE Systems 430p 10.9

Rolls-Royce

As of the end of August, Rolls-Royce was ranked as the 15th largest holding in the 99-strong portfolio of the Woodford Equity Income Fund.

Market sentiment has been moving against the company for some time as a series of profit warnings has unfolded. A trading update on 6 July — the first since the arrival of new chief executive Warren East — saw further weakness, and Woodford “added to the holding progressively throughout the month”. He also bought Rolls-Royce as one of a select group of “high-conviction” blue chips for his new smaller-company-focused Patient Capital Trust.

Rolls-Royce’s shares closed at 802p on the day of the trading update and fell as low as 718p before the month was out. So, you can buy the shares today at a far lower price than Woodford was paying in July. Roll’s Royce’s long-term prospects haven’t changed, and this looks a good opportunity to buy into a company with “world-class technology, a fantastic product suite and a brimming long-term order book”.

Legal & General

L&G ranks at no. 6 in Woodford’s equity income fund, and is also another high-conviction blue chip he’s bought for the Patient Capital Trust.

Woodford has long been averse to investing in FTSE 100 financials, so it’s an added recommendation that L&G is his only blue-chip stock in the sector, and, furthermore, one he views as a “core holding”.

L&G’s attractions were set out in a fund update earlier this year:

“The life insurance industry has historically been opaque and unpredictable but, with a relentless focus on cash generation, Chief Executive, Nigel Wilson, is transforming the business into a much simpler, easier to understand business with strong growth prospects. We remain attracted to the dividend yield [5.8% today] and the prospect of attractive dividend growth in the years ahead”.

Woodford has said he added to his position in L&G during April, May and July — at which times the shares were trading at a higher level than today. So, again, this is share you can now buy at a discount to prices the master investor has been willing to pay.

BAE Systems

BAE Systems is another top Woodford holding on a below-market-average P/E. Indeed, BAE — ranked no. 10 in his equity income fund — has the lowest P/E of the three companies featured in this article.

Defence budgets in BAE’s major markets have been tight over the last few years, but — as with Rolls-Royce — a longer-term view comes into play; something that differentiates Woodford from many in the City.

Over a year ago, Woodford saw BAE as “significantly below fair value” when the stock was trading in the 425p-450p area, but he was also a buyer in the run-up to this year’s General Election, at which time the shares were above 500p. At today’s price were back into the territory of significantly below fair value.

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G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.