For a variety of reasons, some of the UK’s biggest companies are currently trading at a prices below their intrinsic values. Brexit, the US-China trade war, and tensions between Iran and the US are often pinpointed as part of the reason that some shares appear cheap.
With some stock prices indicating the company is undervalued, I think now could be a great time to start investing. Investors should remain cautious and ensure they are not buying a portion of a business that has an inherent problem.
I would consider buying shares in the following companies.
Legal & General
Legal & General (LSE: LGEN) remains one of my favourite FTSE 100 companies. Over the past several years, the financial giant’s share price had slumped due to fears over Brexit. The stock is now recovering, with its price up by 25% over the past five years.
Although these gains are good, I believe the company is still trading below its intrinsic value. Its price-to-earnings ratio is just 10, and has a prospective dividend yield of 5%. Legal & General has a track record of increasing this dividend increasing year after year.
We haven’t heard the end of Brexit, so I would expect some further fluctuation in Legal & General’s share price in the coming months. However, the business has the relevant authorisation from the EU, and consequently seems well prepared for Brexit.
Recently, HSBC’s (LSE: HSBA) share price has been weighed down by the US-China trade war, protests in Hong Kong, and Brexit. As with most banks, investors have concerns about the company’s profitability as a result of very low interest rates. Consequently, its stock price has dropped by 24% in the previous two years. I think this puts the bank’s share price in the ‘bargain buy’ category.
Currently, HSBC is trading at a price-to-earnings ratio of 12, with a prospective dividend yield of approximately 6%.
Although the bank is exposed to geopolitical tensions and low interest rates, I believe the market’s pricing of these risks to HSBC is too harsh.
Interim CEO Noel Quinn is taking action, cutting costs and shifting some resources away from Europe and US to its more profitable market, Asia. In the long run, this could end up being a wise move for the bank.
Royal Dutch Shell
Royal Dutch Shell (LSE: RDSB) is another business that has fallen out of favour with investors. Its share price has dropped by 10% over the past two years, making its price-to-earnings ratio 10 and giving it a prospective dividend yield of 6%.
The worrying situation in Iran has raised oil prices, and further increases might well be on the way, especially if the supply chain is disrupted, as my fellow-Fool Vishesh Raisinghani notes. Expected quarterly oil production for the company is a slight improvement on previous expectations.
Long term, I think the company could be a good bet, as it has been ploughing billions of dollars towards a transition to renewable energy, with billions more earmarked for the next few years.This could put Shell in a great position as a leader in the field.
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T Sligo has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings. 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.