What a year it’s been for investors, with Covid-19 crashing stock markets in the spring, only for them to bounce back in the summer. Now, as the US stock market scales new heights, it’s like coronavirus never happened. As I write, the S&P 500 index stands at nearly 3,625 points, up 395 points (12.2%) in 2020. However, I see bubble-like valuations in many US stocks, notably in the tech industry. It’s been a different tale on this side of the Atlantic, with the FTSE 100 index hovering around 6,391 points, down 1,150 points (15.3%) in 2020. Hence, I’m convinced that cheap shares lurk within the Footsie. Here are two that I’d buy today.
Cheap shares: BP is still a bargain price
It’s been a gruesome year for oil & gas investors, with Covid-19 hitting demand for fossil fuels. The price of a barrel of Brent Crude oil crashed from $70 in January to below $16 in late April. However, it has since recovered to $48 today. This double whammy of coronavirus and falling prices smashed the share prices of oil & gas companies, dumping these stocks in the ‘cheap shares’ bin.
Take UK energy supermajor BP (LSE: BP), whose share price crashed to 25-year lows last seen in the mid-90s. Having hit a 52-week closing high of 504.1p on 6 January, BP’s share price collapsed as the pandemic spread. Amazingly, its cheap shares plunged to close at 193.44p on 28 October, crashing an incredible 61.6%. However, as good news emerged this month, BP’s stock has started gushing again. As I write, it trades at 267.55p, ahead more than 74p (38.3%) in four weeks.
I do believe there is more to come from this stock. Even after its recent rebound, BP is valued at a mere £49.5bn — a shadow of its former self. Yes, this industry faces an uncertain future in the transition to a zero-carbon world. But the group is cutting thousands of jobs and slashing billions from its costs and capital expenditure. Meanwhile, BP shares yield a juicy 6% a year, paid quarterly in cash. That’s more than enough for me to back a brighter future for it by buying its cheap shares today.
GSK keeps getting cheaper
I’ve written about UK pharma giant GlaxoSmithKline (LSE: GSK) rather too often this year. That’s largely because — somewhat counterintuitively during a global pandemic — this particular drug firm’s shares keep on getting cheaper. This confuses me, as GSK is a world leader in vaccines, as well as in immunology, oncology (cancer), HIV/AIDS, and respiratory treatments. Yet in 2020, GSK shares have greatly underperformed those of its larger British rival AstraZeneca.
I’m no seer or oracle, so I can’t predict the future. Then again, I do expect better returns for GSK shareholders in the years ahead. After all, for the past five years, GSK has paid a yearly dividend of 80p a share. At the current share price of 1,378.6p, this translates into a chunky cash dividend yield of 5.8% a year, paid quarterly. That’s a decent incentive for buying and holding GSK while its share price recovers (it peaked at a closing high of 1,846p on 17 January, just 10 months ago). Finally, in historical terms, GSK’s stock is cheap on fundamentals, trading on a price-to-earnings ratio of 10.9 and an earnings yield of 9.2%. For me, this is far too cheap and, as an existing GSK shareholder, I’d happily buy more stock today!
