Over the past six months, the FTSE 100 has fallen by around 11%, a disappointing performance for the UK’s leading stock index.
However, this performance has thrown up some fantastic bargains. Shares in some of the UK’s largest businesses are now trading at valuations not seen since the financial crisis, which is excellent news for investors.
Today I’m looking at one FTSE 100 stock that I think has been oversold and could be worth including in your portfolio.
Rock-solid income
Rio Tinto (LSE: RIO) is a Footsie 100 staple. The business is one of the most significant constituents of the index and one of the largest mining companies in the world. Unfortunately, the firm’s size didn’t stop investors dumping shares in the business during 2018. The stock is down around 11% from its 52-week high of 4,500p printed on June 6.
I think this presents a compelling opportunity for investors to buy the shares today. After recent declines, the stock is trading at a forward P/E of just 9.6 and supports a dividend yield of 6% based on analyst payout expectations for 2018.
A few years ago, management adopted a new dividend payout policy, abandoning the old progressive dividend policy in favour of a more flexible plan whereby Rio would pay out a certain percentage of earnings every year. Under the new policy, investors have pocketed an average dividend yield of 6% for the past two years, and it looks as if this will continue in 2018 and 2019, based on current analyst estimates.
This level of income and predictability is, in my mind, worth a premium valuation and when the market sentiment improves, I think it is only going to be a matter of time before shares in Rio return to their previous highs as investors pounce on the opportunity.
So, 2019 could be the year that Rio’s shares explode, and if they continue to languish, then investors are set to receive a dividend yield of around 6% — what’s not to like?
50% upside
Another undervalued mining company I’ve got my eye on is Ferrexpo (LSE: FXPO). This business does not have the same kind of income credentials as its larger peer, but what it lacks in income, the stock more than makes up for in valuation.
Specifically, right now, shares in Ferrexpo are trading at a forward P/E of just 4.8.
Granted, City analysts have pencilled in a decline in earnings per share of 22.1% for 2018, so I agree that the stock deserves a discount to the rest of the mining sector. However, a discount of 36% (the rest of the mining sector is trading at an average P/E of 7.5) seems too steep.
I reckon a multiple of around seven times forward earnings is more appropriate. This implies a share price of 301p or an upside of 52% from current levels. In addition to this possible capital gain, analysts believe the company will distribute a total of $0.12 per share to investors in 2019 implying a dividend yield of 4.6% on the current share price.
Once again, it looks to me as if this is a deeply undervalued and unloved stock that is just waiting to stage a recovery in 2019.
