Although the FTSE 100 has gone some way to regain its recent losses, there are still some good buying opportunities in the market.
The recent share price slump is, of course, mostly due to the coronavirus. Investors always fear uncertainty and, at the moment, no one understands how the virus will affect the economy. With the government suggesting that up to a fifth of the UK’s workforce could be off sick at the same time, it’s surely no surprise investors have been anxious.
It takes a strong stomach to put money into a market when many others are pulling out. Investors should be thorough with their research and stick to their principles. In these times, an investor must exercise caution, as value traps will often be disguised as bargain buys. Just because something is trading at a cheap price, doesn’t mean it’s a wonderful buy.
With that in mind, here are two stocks I believe are trading at a price below intrinsic value. Are they bargain buys or value traps?
Lloyds (LSE: LLOY) is a company that I’ve previously dismissed, favouring its international focused rival bank, HSBC. It’s true that banks are often one of the first stocks to suffer in a market wobble. Yet the Lloyds share price has been falling for the past number of years, dropping by 38% in the past half-decade.
The drop in its stock price means Lloyds is trading at a cheap price-to-earnings ratio of 13.5, with a prospective dividend yield of 7%. On the face of it then, there’s a lot to get a value investor interested.
Being a UK-focussed bank, its fortunes are closely linked to the country’s economy. Therefore, uncertainty surrounding Brexit weighed heavily on the stock price. It was also rocked by the PPI scandal, setting aside £2.5bn for 2019 PPI payments.
With these issues hopefully now behind it, the bank wants to become a leaner outfit. It will be focussing on its core activities, closing branches and cutting jobs.
If the UK’s economy prospers, I believe Lloyds will too. I think this stock is a bargain buy.
Tesco’s (LSE: TSCO) share price hasn’t suffered quite like Lloyds. Its value has only dropped by 4% in the past five years. This is despite operating in a highly competitive market, with entrants such as Aldi and Lidl taking a slice of the pie. Volume and margins are as crucial as ever in the supermarket industry.
Its price-to-earnings ratio is currently 17, and its prospective dividend yield is 2.4%
In the 19 weeks to 4 January, Tesco’s UK and Ireland like-for-like sales grew by 0.4%. However, due to the group’s restructuring of its Central European business, its total like-for-like sales were 0.9% lower.
In this highly competitive market, I would avoid Tesco shares and would add them in the value trap basket. The industry seems to be in a race to the bottom, and that isn’t enough of a competitive moat for me.
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T Sligo has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings, Lloyds Banking Group, and Tesco. 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.