These 2 FTSE 100 stars are up 60% in a year but still look massive bargains

Harvey Jones wonders at two top stocks combining rapid share price growth with rock bottom valuations.

| 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.

A soaraway growth stock available at a low valuation is a rare thing. Normally, if a stock thrashes the market, it quickly starts trading at 20 or 25 times earnings. Yet these two FTSE 100 flyers are pretty much the cheapest on the entire index, as measured by their P/E ratios. Are they as good as they look?

Berkeley buzz

Berkeley Group Holdings (LSE: BKG) is up 57% over the past year and 160% over five years, but trades at just 8.35 times earnings. Berkeley’s low valuation continues to reflect fears that Brexit will sink the housing market, despite its robust performance since the EU referendum.

Anxiety topped out last month as directors at Redrow and Cairn Homes offloaded stock, as did Berkeley founder and chairman Tony Pidgley, who sold around 750,000 shares for £26.8m. Have they spotted something we have missed? I cannot feel too negative about the housing market, with prices rising a steady 5% in the last 12 months, according to Land Registry figures published this week. The UK is still desperately short of properties.

Yes, mortgage costs may rise next month but given the UK’s economic plight, the pace of any further interest rate hikes will be undemanding. In any case, an uplift of 0.25% adds just £18 a month to a £150,000 mortgage, survivable for most people. 

Property problem

Last month Berkeley said trading conditions were in line with management expectations, despite Brexit, stamp duty uncertainty and slippage in London. The group is on track to deliver pre-tax profits of at least £3bn over the next five years. Sale prices have exceeded hopes and cash balances are up, underpinning earnings visibility and financial strength. The stock offers a forecast yield of 4.9%, handsomely covered 2.5 times, with share buybacks in prospect as well.

The danger as ever is that property could crash as the global interest rate cycle moves, hitting the UK as well. That may explain why City analysts are forecasting a 19% drop in earnings per share (EPS) in 2019. Yet at today’s price Berkeley still looks tempting to me.

Stratospheric growth

British Airways owner International Consolidated Airlines Group (LSE: IAG) is an even higher flyer, up 66% over 12 months and 300% over five years. That is a mighty performance, especially given the troubles afflicting other airlines, such as Monarch and Ryanair. Despite this vertiginous growth, it currently trades at just 7.61 times earnings. 

The group may even be a beneficiary of trouble elsewhere in the industry, as it is said to be eyeing up empty slots at Gatwick Airport following Monarch’s collapse. European airlines Alitalia and Air Berlin have also both recently gone into administration.

Clear winner

International Consolidated Airlines Group posted solid 3.1% passenger traffic growth in September, with a strong Iberia making up for weakness at British Airways. The company’s structural overhaul is bearing fruit and the stock now offers a forecast yield of 4.3%, covered 3.6 times, on top of that impressive share price growth.

Three years of double-digit EPS growth (95%, 79%, 27%) are forecast to slow to just 2% in 2017, then recover slightly to 9% in 2018. So future growth may be less impressive. However, it has flown impressively through recent sector turbulence and at today’s rock bottom valuation still looks a buy to me.

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.

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

How much would I need to invest in income shares to earn £300 a month?

What kind of lump sum would be required to earn £300 a month by taking advantage of some of the…

Read more »

Investing For Beginners

Up 31% in a month, could this FTSE 250 stock be getting bought out?

Jon Smith takes a look at speculation that's pushing the share price of a FTSE 250 share higher and considers…

Read more »

Investing Articles

Here’s how I’d follow Warren Buffett to start building passive income in 2025

Ben McPoland highlights one FTSE 250 firm with a strong competitive edge that he thinks can continue rewarding investors with…

Read more »

Investing Articles

Burberry shares: undervalued FTSE gems that are ready to rocket?

Burberry shares soared at the beginning of the week as the takeover rumour mill went into overdrive. Is Paul Summers…

Read more »

US Stock

Here are the latest share price forecasts for S&P 500 giant Amazon

Amazon has generated monster gains for investors over the last decade. And Wall Street analysts believe the S&P 500 stock…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »