Three things stand out when I look at the bargain FTSE shares I’ll buy when I feel the markets have bottomed out.
They have low or zero debt, are reporting record profits, and they’re market leaders in stable or fast-growing industries.
Bargains to avoid
In the post-coronavirus economy, companies with unsustainable debt will be the first to fall. Take Cineworld (LSE:CINE) for example. It makes a billion pounds a year. But its shares dropped 49% in the market rout. It’s also not good for investors in my view. Bosses announced recently that if the US or UK impose an Italy-style lockdown to contain the spread of coronavirus, it could go bust within four months.
In business speak, this was worded: “The existence of a material uncertainty which may cast significant doubt about the group’s ability to continue as a going concern.”
The industry as a whole is not growing. And now Cineworld has £3.5bn in debt (!) from plans to buy out its rivals. “There is no changing the plan,” CFO Nisan Cohen told Reuters. Really? Just as you start paying off the massive refinancing for the £2.4bn Regal Cinemas buyout from 2018, you’re forging ahead with another £1.3bn buyout. I’m not convinced this is a good idea.
Ones to watch
This market meltdown is a chance to re-evaluate. How much of your net worth is in low-quality stocks and shares? But caveat emptor. It’s choppy out there. I’m waiting for markets to calm down before making any new buys. Here are two I’m considering.
For dividends: Aviva
Aviva (LSE:AV), the FTSE 100 insurance giant, has just reported record operating profits at £3.2bn. Its capital solvency II ratio has grown to 206%. A ratio of 100% would mean it has enough capital to meet its obligations in the event of a severe economic shock. Ideally regulators want to see this figure at 160% or higher.
It has produced a return on equity (ROE) of 14.3%, beating management targets. ROE is a way of showing how well a company returns profits to its shareholders.
I’m not too focused on the 10.8% dividend right now. It’s a nice high number, but no double-digit dividend has ever been sustainable. I’m betting it will fall to high single-digits when the share price recovers. Still, on a per-share basis, CEO Maurice Tulloch has sanctioned increased payouts to 30.9p. It is my contender for the best FTSE 100 buy of the stock market crash.
For growth: Team17
Team17 (LSE:TM17), the AIM-listed video game developer, just reported yet another set of record profits and revenue. Results for the 12 months to the end of 2019 showed profits 48% higher at £61.8m, basic earnings per share more than doubling (up 111% to be exact), and all with a price-to-earnings growth ratio at 0.4. Anything under 1, incidentally, is considered undervalued.
Crucially, this expansion has been achieved on the back of zero debt. By my calculations, Team17 produced a 23% return on equity (ROE) for shareholders last year, a good head and shoulders above the sector average of 8%. And it’s all been done without a speck of leverage.
A P/E ratio of 33 may trouble the more traditional value seekers. But faster-growing shares will produce a higher P/E ratio than slower-growth companies paying high dividends.
Focus on the things that matter and you’ll do better in the long run.
Tom Rodgers owns shares in Aviva and Team17. 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.