There are plenty of FTSE 100 stocks trading well below where they were a year ago. The stock market crash in March shaved chunks off the share prices of the UK’s largest companies. September’s sell-off trimmed gains that were made during the recovery that followed.
It’s a tricky time for investors. Right now, there are a lot of FTSE 100 stocks that – judging them on current prices only – look like bargains after the stock market crash. But, low prices do not always mean something is a bargain. It might just be of low quality. And we do not want to own low-quality stocks.
Cheap FTSE 100 stocks
Shares in BAE Systems, Compass Group, and BP all trade at a discount to where they were a year ago. I think their long-term prospects make them bargains and not just cheap, and that’s why I think it’s time to buy these three FTSE 100 stocks.
Shares in BAE systems traded at 669p before the crash. They can be had for 494p now, which is a 26% discount. Half-year results revealed earnings dropped by 15%. BAE makes electronic components for airliners, and that business has all but vanished. However, overall revenue growth has held up well.
BAE’s order book remains strong, particularly in the defence space. Government defence budgets are expected to grow in real terms, which is a long-term boon for BAE. The company’s management is confident about the medium- to long-term prospects for the firm. Evidence for the confidence comes from the decision to pay a delayed 2019 dividend in September and an interim 2020 one in November. The dividend yield should be around 4.9% on this stock.
The Covid-19 pandemic destroyed demand for Compass’s catering services. Revenue dropped 44% year-on-year for the three months up to June 2020. The share price of this FTSE 100 company is 1,230p now. That is 37% below its pre-crash stock price of 1,953p.
However, demand is growing again for catering services. In China, they have recovered completely. In Europe and the US, office attendance is still below average. But this will improve over the months and years ahead. Compass benefited from a trend for companies to outsource catering. If fewer people work in offices in the future, I think this drives the trend forward. A reduced canteen service, which might need to be flexible, supports outsourcing.
Suggesting that it is time to buy an oil and gas FTSE 100 stock, like BP, might sound mad, but oil won’t go away overnight. BP has got rid of underperforming assets, making it a more focused oil and gas company with lower costs. It bought a shale oil asset to diversify its revenue stream. The company is positioned to benefit from a recovery in oil prices.
BP’s gas assets should have a brighter future than its oil ones. Gas is cleaner than oil as an energy source and will stay a part of the energy production mix longer, as the world transitions to a renewable future. BP has already invested in non-oil and gas energy projects and is continuing to increase its wind, solar, and biopower capacity. Moving away from fossil fuels and towards alternatives gives BP a far longer future than its current share price suggests.
James J. McCombie owns shares of BAE Systems, BP, and Compass Group. The Motley Fool UK has recommended Compass Group. 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.