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2 unloved FTSE 100 stocks (including a 9.5% yielder) I’d buy right now

There are few FTSE 100 stocks currently as unloved as tobacco group Imperial Brands  (LSE: IMB) and silver miner Fresnillo  (LSE: FRES). Both are trading at multi-year lows.

Now, it’s not always wise to buy shares in out-of-favour companies. However, going against the herd can often pay off big time. Here, I’ll explain why Imperial and Fresnillo are so unloved, and why I believe they currently offer compelling value for investors.

Rise and fall

Imperial’s shares were making new all-time highs above 4,000p in summer 2016. However, it’s been largely downhill since, with the market becoming increasingly gloomy about regulation, declining industry volumes, and uncertainty about how the emerging market of so-called next generation products (NPGs) will play out.

Imperial released its latest half-year results yesterday, and its shares took another hit, plunging through the 2,300p and 2,200p levels, and closing over 6% down on the day at 2,180p. We’re now looking at a stock that’s getting on for 50% below its previous high.

Mammoth yield and capital gains potential

My colleague Paul Summers, in his review of yesterday’s results, described them as “far from the stuff of nightmares.” I fully agree. Margins and earnings were actually ahead of the analysts’ consensus, but revenue growth was lower than forecast. NGP sales were good overall, but City number crunchers expressed concern about its performance in the big US market.

Nevertheless, the company reiterated its previous full-year guidance for revenue, earnings and cash generation. As far as earnings go, we’re looking at a bargain-basement price-to-earnings (P/E) ratio of just 7.7.

In a previous article, I detailed Imperial’s prodigious free cash flow generation, but suggested its record of 10 consecutive years of 10%+ dividend growth could be set to moderate. However, in yesterday’s results, the company said it expects to deliver another 10% increase this year, giving a prospective 9.5% yield at the current share price.

If management’s confidence in the near- and longer-term outlook for the business proves well-founded, investors today will not only lock in a mammoth starting yield and substantial future income stream, but also should see significant capital gains on a re-rating of the shares in due course. For these reasons, I rate the stock a ‘buy’.

Silver miner with a shiny future

Fresnillo’s share price stood at 737p at yesterday’s market close. This compares to a high of over 2,000p soon after the vote for Brexit in June 2016. Of course market sentiment, as well as the price of silver (and gold, which the company also produces), can be highly volatile at times, and these things tend to be magnified in the volatility of the share prices of miners like Fresnillo.

However, looking through the noise of volatility, I believe Fresnillo has become fundamentally undervalued. Investor sentiment has taken several knocks over the last 12 months due to the company downgrading its silver production guidance. Lower ore grades than anticipated and some operational issues have been the problems.

I think the market has been overly harsh in hammering Fresnillo’s share price down to the extent it has. While earnings for 2019 aren’t expected to make any advance on last year, giving a P/E of 21 at the current share price, analysts’ projections of prices, production and costs have earnings rising 20%+ next year, with a further 20%+ rise pencilled in for 2021. As such, this is another unloved stock I think looks very buyable right now.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Fresnillo and Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.