Everybody loves a bargain, and the following three stocks are among the cheapest on the FTSE 100, as measured by the price/earnings ratio. That is despite barnstorming share price performance as well.
Developing nicely
Normally, when a stock has doubled or tripled in value, you would expect it to be trading at a hefty valuation. That isn’t the case with housebuilder Barratt Developments (LSE: BDEV). It has grown 327% in the past five years, yet currently trades at just 9.23 times earnings. The sharp drop after Brexit is the most obvious reason, although it has steadily recovered lately.
I still think that housebuilders were unfairly punished given that demand for property still vastly outweighs the limited supply. Last week’s Housing White Paper will do little that is meaningful to boost supply, which means there is a ready market for whatever Barratt can build. Sales, forward sales, completions, demand and profits are all rising steadily. All this and a 3.5% yield too. The only cloud is the slowdown in the high-end London market. UK house prices may continue cool slightly but I still think Barratt is building a strong future.
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I’m IAG, fly me
British Airways owner International Consolidated Airlines Group (LSE: IAG) looks even cheaper trading at just 7.93 times earnings. Yet it has also enjoyed a bumper five years, growing 170% in that time. To put that in perspective, the FTSE 100 is up just 20% over the same timescale. Why so cheap?
Again, Brexit plays a part. IAG’s share price collapsed after the referendum, in line with sterling, on expectations that British holidaymakers would find going abroad more expensive. Like Barratt, it has recovered lately, climbing 20% in the last six months as initial Brexit fears looked overdone. IAG’s airlines carried more than 100m passengers last year and latest figures show revenues up 3.9% year-on-year in December and flight load factor jumping from 78.6% to 79.2%. Brexit could prove a headwind once the real negotiations start, but the cheap valuation and nicely grounded 2.93% yield makes IAG a flier for me.
Power of three
Here we are again, another stock with a storming five years behind it, another dirt cheap valuation. Private equity and infrastructure investor 3i Group (LSE: III) is up 258% with only a slight Brexit stutter. It has soared 83% in the last 12 months alone, yet Digital Look has it trading at just 8.3 times earnings.
3i Group earns its money by investing in mid-market businesses, overhauling them, then using its contacts to develop them into international operations. It has met with plenty of success, although this type of trade can act as a geared play on share prices, beating the market when optimism is high, such as now, trailing when animal spirits fade, which could happen.
It also looks like a relatively straightforward to way of getting exposure to private equity, and although there are dangers, as not every turnaround (like Agent Provocateur) will prove a success, it should inject some excitement without undue risk. A yield of 3.1% is also impressive, with the dividend increasing almost as fast as the share price.
