While markets around the globe have looked pretty expensive for a while now, some of the UK’s biggest companies have dropped considerably in value. This might not be pleasant for existing holders, of course, but it does provide opportunities for value-focused contrarians to begin taking positions.
With this in mind, let’s take a closer look at two FTSE 100 constituents and ask whether they are screaming buys in 2018.
Loss of spark
Power supplier National Grid (LSE: NG) has been a firm favourite among income investors for good reason. Based on analyst expectations for the new financial year, the stock yields a whopping 5.8%. As a comparison, that’s well over four times what you’d get from the top instant access cash ISA right now.
Nevertheless, the threat of a Jeremy Corbyn-led renationalisation of utilities, ongoing tensions with Ofgem and the rise in interest rates have hit sentiment towards the stock. Priced just under 1,100p each last May, the shares fell to a low of around 740p back in February, only to recover slightly in recent weeks.
Considering that the firm’s latest update contained little in the way of shocks, recent negative sentiment feels overdone. Full-year underlying earnings before interest and tax (EBIT) is now likely to be “in line with expectations” even if headline group EBIT is forecast to be lower due to major storms in the US and remediation costs of roughly £140m. On a positive note, some of this will be offset by changes to US tax law, meaning that the company will pay a lower corporate tax rate than before.
It may not be the FTSE 100 bargain of the year but a price-to-earnings (P/E) of 14 for next year suggests the shares look decent value at the current time.
Heavily shorted
Despite trading on just 10 times earnings and offering a sizeable 6.7% dividend yield, Marks and Spencer (LSE: MKS) — like many operating in the retail sector — continues to be out of favour.
Just under a year ago, its shares almost breached the 400p mark. On Friday, they were trading nearly 30% lower in value suggesting that many still need to be convinced by CEO Steve Rowe’s strategy for turning the company around.
As a further indication of this, Marks is currently the seventh most shorted stock on the market. Although those betting against companies aren’t always right, the scale of the pessimism surrounding the £4.6bn cap is telling.
Clearly, whether Marks and Spencer’s stock constitutes a bargain depends on whether you believe it can remain competitive. In contrast to fellow retailer Debenhams, I’m inclined to believe it can.
The company is attempting to grow sales online to offset any further weakness on the high street, has a great food offering and is continuing to close (or downsize) some stores while simplifying its management structure. Indeed, it was recently announced that executive director Patrick Bousquet-Chavanne would be the latest departure from the company, leaving at the end of May.
Like National Grid, CEO Steve Rowe and his team will report to the market next month. If they can offer the slightest indication that their strategy is working, expect the shares to regain their spark.
Overall, I’m tempted to suggest that investors have become too comfortable in their hatred of the stock and therefore rate the shares as a “cautious” if perhaps not “screaming” buy.
