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£2k to invest? I’d buy these 2 cheap FTSE 100 stocks ahead of the recovery

Image source: BAE Systems

If I had £2k to invest right now, or any other sum, I’d be scouring the market for cheap FTSE 100 stocks to top up my portfolio. I’d look to buy them sooner rather than later, because I think shares look relatively attractive at today’s valuations.

FTSE 100 stocks look cheap because the UK market has underperformed against international rivals since the 2016 Brexit referendum. After stealing a march on vaccinations, we have a chance to play catch up. Here are two shares with a global reach that could benefit.

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Defence manufacturer BAE Systems (LSE: BA) has been hit hard by the pandemic, its stock trading 21% lower than a year ago. Although it quickly restored its dividend after cutting it during the first lockdown, investors remain wary. Its civil aerospace division, which makes parts for Boeing, has been hammered by global flying bans. However, robust defence sales have compensated.

This share yields more than 5%

Yesterday, the BAE Systems share price enjoyed a lift after management posted a 4% rise in full-year profits to £20.9bn. It expects sales to grow 5-7% in the year ahead, with underlying profits on course to rise over 10%.

The FTSE 100 stock is also paying dividends, and currently offers a juicy forecast yield of 5.3%, covered 1.9 times by earnings. The share price looks relatively cheap as well, trading at just 9.7 times forward earnings.

Commercial aviation is still suffering though, with supply chain interruptions a further headwind. If lockdowns drag on, that could delay its recovery. Another worry is that net debt has increased, as management has paid down pension obligations and pursued acquisitions. However, I’m hoping acquisitions will more than pay for themselves by boosting long-term profits.

I think this stock is a long-term buy-and-hold opportunity, given its cheap valuation and healthy growth prospects.

Asia-focused insurer Prudential (LSE: PRU) is another FTSE 100 stock that looks cheap today, trading at 11.8 times forecast earnings. Unlike BAE Systems, its share price has proved fairly resilient during the pandemic. After crashing along with everything else last March, it’s rallied nicely, jumping 21% over six months. Over five years, it’s up 36%.

Both FTSE 100 stocks look cheap to me

Prudential’s exposure to Asia is serving it well, as the continent has weathered the pandemic better than Europe and the US. The group is now doubling down on this, by floating US annuities division Jackson for an estimated $5bn, and raising up to $3bn in new equity to attract Asian investors.

The equity move has dismayed some investors but, again, I’m hoping that investing in growth will reap rewards. Asia has a large and fast-growing middle-class that will increasingly want the financial products Prudential specialises in, such as pensions and protection. I do not expect a rapid return, though. I will be patient, and wait for its Asian and Africa investments to pay off.

My major concern is that it could get caught up in growing political tensions between China and the West, as has happened to HSBC Holdings. Retaining its London listing makes this more likely. Another big downside is that it has slashed its dividend to fund expansion plans. That means it now yields just 0.9%.

Prudential isn’t much of an income stock nowadays, sadly, but I’m going for growth with this one and I still think this FTSE 100 stock is a good way for me to play emerging markets.

This growth opportunity also excites me.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Prudential. 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.