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Neil Woodford has just bought these 3 FTSE 100 stocks for his Equity Income Fund

Since the suspension of his Equity Income fund in early June, Neil Woodford has been in the process of repositioning the portfolio. The portfolio manager has been selling out of the smaller, early-stage companies that were in the fund, many of which were unlisted, and reinvesting the proceeds into more liquid FTSE 100 and FTSE 250 companies.

After the release of the Equity Income fund’s half-year report recently, we can now see some of the FTSE 100 names that Woodford has been buying. According to the report, he spent £145m on three new FTSE 100 companies for his portfolio in the first half of the year – International Consolidated Airlines, BT Group, and British American Tobacco.

Now, while Woodford’s recent performance has been abysmal, he does have a good long-term track record when it comes to investing in large-cap companies. With that in mind, should investors follow him into these stocks?

Value approach

These purchases suggest that Woodford is sticking with his value-oriented, contrarian approach to investing. All three stocks are out of favour with investors and are trading at low valuations. Just look at the forward-looking P/E ratios of these three companies:

International Consolidated Airlines: 4.1
BT Group: 6.9
British American Tobacco: 9.1

All three trade way below the FTSE 100 median forward P/E ratio of 13.3. If investor sentiment towards these companies improves, Woodford could enjoy considerable gains.

Risky picks

That said, my issue with these three FTSE 100 stocks is that I see all of them as quite risky. All three are out of favour with investors for a reason.

Consider International Consolidated Airlines, the owner of British Airways. Not only is it facing Brexit uncertainty and strong competition from low-cost rivals, but the company is also dealing with issues such as staff strikes, IT problems, drone disruptions, and rising fuel costs. My colleague Roland Head believes profits could nosedive if market conditions worsen.

The outlook for British American Tobacco looks highly uncertain too. Not only are smoking rates declining across the world, but US regulators want to ban the sale of menthol cigarettes, which could hit the company’s profits significantly. Additionally, there are also now concerns about the safety of e-cigarettes. Furthermore, a mega-merger in the US between tobacco giants Philip Morris International and Altria announced last week also adds uncertainty for BATS.

As for BT, to my mind, it’s a great example of a ‘low-quality’ stock. Revenues are falling, debt is high, the pension deficit is huge, and the dividend looks unsustainable. It’s not a stock I have any interest in owning.

Better stocks to buy 

Given the uncertain outlook that each of these companies faces, I’d hold off on buying them, despite their low valuations and high dividend yields. All things considered, I think there are much better stocks to buy in the FTSE 100 right now.

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Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.