These quality stocks have dived since June. I’d buy these cheap shares today

Most UK stocks have rallied over the past six months, but some quality companies have been left behind. I’d buy these two cheap shares today.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

From June, the FTSE 100 index zigzagged downwards, losing ground as rising Covid-19 infections worried investors. By Halloween, the Footsie had dropped 590 points — almost a tenth (9.6%) — as share prices drifted downwards. Then came a near-record month, with cheap shares staging a massive comeback and the FTSE 100 leaping by almost an eighth (12.4%) in November. However, not all stocks rose in this relief rally, with several quality companies lagging behind.

Bottom-fishing for cheap shares

From early June until today, 29 FTSE 100 members have seen their share prices decline. The worst performer has crashed by almost a quarter (24.1%), while the best of these 29 losers had its share price dip by just 0.3%. Overall, the average decline among these laggards is 9%, with 12 stocks recording higher falls than this. I see this ‘dirty dozen’ as fertile ground for bottom-fishing — finding unloved and cheap shares ready to rebound. Here are two quality stocks I like the look of today.

BP is the bottom pick

Oil & gas giant BP (LSE: BP) has the dubious honour of being the worst-performing FTSE 100 stock over the past six months. BP shareholders have had a terrible year, due to the oil price crashing as fuel demand dried up during lockdowns. In early 2020, a barrel of Brent crude cost around $70. At its low on 22 April, Brent crude traded below $16 a barrel. As a result, and following a hefty dividend cut, BP’s share price imploded.

BP stock crashed spectacularly from 471.6p at the end of 2019 to just 188.52p by 28 October. At this point, these cheap shares were priced at a 26-year low. Since then, BP stock has bounced back hard and now trades at 262.46p, up almost two-fifths (39.2%) from its low. Despite this healthy recovery, I suspect BP shares are trading at a discount to their underlying value. After all, BP — one of the world’s energy supermajors — has a market value just above £50bn today. Obviously, BP is not a stock for green/environment investors, but its shares offer a compelling dividend yield of 6% a year. In a world of low or negative interest rates, this is a passive income not to be missed. That’s why I’d buy BP’s bargain stock today.

Will GSK bounce in 2021?

The second of my ‘loser picks’ of the past month is GlaxoSmithKline (LSE: GSK). The cheap shares of the UK’s #2 pharma giant keep getting steadily cheaper this year. In fact, they are at #24 in my list of 29 losers, down nearly a sixth (16.4%) in the past six months. Since hitting its 52-week peak of 1,857p on 24 January, GSK stock has dived to just 1,397p today. That’s a decline of 460p — almost a quarter (24.8%) — from the January high.

In a year when UK and US healthcare stocks have boomed, GSK has completely missed this rising tide. I struggle to understand this, because its cheap shares look attractive to me. Having been a GSK shareholder for most of the past three decades, I see this stock as a prime candidate for recovery in 2020. After all, GSK shares trade on a lowly price-to-earnings ratio of 10.8% and an attractive earnings yield of 9.2%. Even better, they offer patient investors a bumper dividend yield of 5.7%, with quarterly cash dividends totalling 80p a share. As a lifelong follower of GSK, I am happy to continue reinvesting my dividends into more shares, waiting patiently for a rebound in 2021!

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Cliffdarcy owns shares of GlaxoSmithKline. The Motley Fool UK has recommended GlaxoSmithKline. 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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »