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Is it time to buy these two undervalued FTSE 100 champions?

From the end of June the FTSE 100 has been on a tear, rising by more than 14% since June 28. These gains have erased all of the index’s losses for the year.

Almost all the index’s constituents have benefitted from this rally although some stocks, such as easyJet (LSE: EZJ) have been left behind. Indeed, year-to-date shares in easyJet are down by 36% excluding dividends, lagging the FTSE 100 by 45.5%. That’s a staggering underperformance.

However, these declines could be a great opportunity for long-term value investors. 

A well run business 

EasyJet has proven itself to be an extremely shareholder-focused company over the past decade. Further, management has shown a disciplined approach to capital allocation by not chasing growth at any cost. Compared to its peers, easyJet is also well-positioned to capitalise on the rising demand for air travel with a recognisable brand and cost advantage over the rest of the industry. 

Put simply, easyJet’s business has some extremely attractive traits, yet it seems the market is currently more concerned with the company’s near-term trading outlook following terrorist attacks across Europe.

So far these concerns seem to have been overblown. EasyJet’s monthly passenger statistics press release issued at the beginning of August showed a 6.7% year-on-year increase in passenger numbers for the month ending July 2016 and a 1.5 percentage point increase in load factor. Still, for the quarter ended 30 June 2016 the company reported a decline in per seat revenue of 8.3% and a total decrease in revenue for the period of 2.6%. Bookings for the fourth quarter are also showing similar trends. 

While these numbers are concerning, they certainly don’t warrant a 36% decline in easyJet’s shares. Granted, City analysts currently expect the company’s earnings per share to fall by 23% this year, but even after factoring in this earnings decline, the shares are still trading at a forward P/E of 10.4, a multiple that appears cheap when considering easyJet’s historic growth rate.

A dividend champion 

As shares in easyJet have lagged the FTSE 100 over the past three months, shares in HSBC (LSE: HSBA) have outperformed the UK’s leading index by 15% excluding dividends over the same period. Yet even after these gains, the shares appear undervalued as an income investment. 

At the time of writing, HSBC’s shares support a dividend yield of 6.9%, compared to the FTSE 100 yield of 3.7% and the UK market median of 3.3%. Generally speaking, if a company’s dividend yield greatly exceeds the market average it’s an indication that the market believes the payout is unsustainable. However, if the company in question can prove that the payout is sustainable, income investors will return to the shares, pushing the share price up and the yield down. 

HSBC’s management has made several commitments to the bank’s dividend so far this year and it looks as if the market is finally starting to believe that the payout is here to stay. 

If income seekers push HSBC’s dividend yield down to the FTSE 100 average of 3.7% the shares could be worth 1,000p. Although, considering the bank’s historic dividend yield is in the region of 5%, it’s more reasonable to suggest that the shares could rise to the 700p-800p level if the company can prove the payout isn’t set to be cut. At 800p, shares in HSBC would yield 4.7%.

The worst mistake you could make

According to a study conducted by financial research firm DALBAR, the average investor realised an average annual return of only 3.7% a year over the past three decades, underperforming the wider market by around 5.3% annually.

This underperformance can be traced back to several key mistakes that all investors make. To help you realise and understand the most common mis-steps, the Motley Fool has put together this new free report entitled The Worst Mistakes Investors Make.

The report is a collection of Foolish wisdom, which should help you avoid needlessly losing too many more profits. Click here to download your copy today.

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