Despite the recent stock market rally, a number of FTSE 100 shares continue to trade at prices that may not reflect their long-term potential. As such, they could prove to be among the best stocks to buy now. That is because of their capacity to deliver recoveries in the coming years.
Clearly, there is no guarantee that any stock will ever bounce back to its previous levels. The economic outlook could deteriorate, or their financial performance may disappoint.
However, I feel the risk/reward opportunities on offer from these two companies could make them relatively attractive. As such, they may be worth buying now and holding for the next decade.
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An undervalued company relative to FTSE 100 shares
GSK’s share price has declined heavily in recent weeks after the healthcare business warned that its dividend may be cut in future. As such, it has underperformed many other FTSE 100 shares in the last year. It is currently down 25% over the last 12 months.
As a result of its stock price decline, the company now has a price-to-earnings (P/E) ratio of around 11. This suggests that it could be undervalued relative to the wider stock market. And with a dividend yield of over 6%, investors may have priced in the potential for a reduction in dividend payouts over the coming years.
A stock with improving long-term prospects
Another company that has underperformed many FTSE 100 shares in the last year is Imperial Brands. The tobacco business’s shares have declined by around 20%, with investors adopting a cautious stance due to its change in management and disappointing financial performance. It also faces a general decline in smoking in many markets.
Looking ahead, Imperial Brands is forecast to return to profit growth next year. Its dividend yield of almost 10% suggests that it could offer good value for money relative to other FTSE 100 shares. And, with a refreshed management team and new strategy, it may be able to expand its presence in the lucrative next-generation products segment that includes e-cigarettes.
Building a diverse portfolio of UK shares
Although GSK and Imperial Brands may offer good value for money after their recent share price declines, there is no guarantee that they will deliver outperformance of other FTSE 100 shares. In fact, there is no guarantee that they will produce positive returns over any time period due to the uncertainty that continues to exist in the world economy at the present time.
As such, it is worthwhile diversifying across a wide range of companies. This can reduce the scope for one or more poor performers to negatively impact on a portfolio’s returns. Through building a diverse portfolio, it may be possible to experience a period of growth – especially among today’s undervalued shares. They may offer the greatest scope for capital growth in a likely stock market rally over the coming years.
