Over the last decade, value stocks have generally been out of favour. This year however, they’ve made a big comeback. In the first half of 2021, many value stocks outperformed popular growth stocks, such as Apple and Tesla.
I’m not planning to load up on value stocks. That’s because many cheap stocks are cheap for a reason. That said, I think there are some great opportunities in this area of the market at present. Here’s a look at two FTSE 100 value stocks I’d be happy to buy for my portfolio today.
A top FTSE 100 value stock
The first I want to highlight is insurer Prudential (LSE: PRU). It currently sports a forward-looking price-to-earnings (P/E) ratio of 12.2, well below the median FTSE 100 forward-looking price-to-earnings ratio of 16.2.
The main reason I’m bullish on Prudential is that, shortly, it’ll be focused purely on Asia and Africa. At present, it still has some US operations, but this division is about to be demerged.
Asia and Africa offer an enormous opportunity for financial services companies like Prudential. It’s no secret that wealth is rising rapidly across Asia. What many people don’t realise however, is that Africa currently has one of the fastest-growing middle classes in the world. In the years ahead, the increase in wealth across these regions is likely to create strong demand for insurance and investment solutions. Prudential believes that once it has separated off its US arm, it can achieve sustained double-digit growth in embedded value per share.
There are a few risks to be aware of here. One is political uncertainty across Asia. This has impacted growth in recent years. It’s also worth noting that Prudential is considering a $2.5bn-$3bn equity raise once the demerger is completed. This would have a dilutive effect on the ownership percentage of existing shareholders.
But I’m comfortable with the risks. I see the long-term growth story here as very attractive.
32% upside?
Another FTSE 100 value stock I’d buy today is DS Smith (LSE: SMDS). It’s a leading provider of sustainable packaging solutions. It currently has a forward-looking P/E ratio of about 14.3.
I’m bullish on DS Smith for a number of reasons. Firstly, the company looks set to benefit from the global economic recovery we are seeing right now. Higher levels of economic activity should translate to higher demand for packaging.
Secondly, DS Smith has significant exposure to the e-commerce industry (it’s a major supplier to Amazon). In the years ahead, the e-commerce industry is likely to experience significant growth. This should provide tailwinds for the FTSE 100 company.
Third, it should also benefit from the increasing focus on sustainability. “The growth drivers of e-commerce sustainability and plastic-free packaging have accelerated over the last 12 months and we are very well placed to capitalise on this growth,” the company advised recently.
One risk to be aware of is supply chain challenges. Currently, cardboard isn’t making its way back to recycling plants quickly enough (because so many deliveries are being made to homes). As a result, there’s a shortage of raw material. Inflationary cost pressures (energy, transport, labour, etc) are also a risk.
Overall however, I think the stock’s risk/reward profile is attractive. It’s worth noting that in late June, analysts at JP Morgan raised their price target for DS Smith to 557p – 32% above the current share price.
