The FTSE 100 finished poorly last week as US inflation sent shockwaves through global markets. In fact, it fell over 2% on Friday.
However, I’ve long seen the lead index as a great place to look for bargain stocks. There’s a wealth of profit-making, yet unfashionable stocks on the index.
There are several reasons for this. Some investors have been put off by Brexit in recent years. But also many of the FTSE 100’s constituents just aren’t in vogue right now — it contains many mining stocks, oil and gas companies, and several tobacco firms.
Today, I’m looking at three stocks with price-to-earnings ratios below six. The P/E metric is calculated by dividing the company’s share price by its earnings per share and it’s a way of valuing a company. So a P/E under 6, is what I’d consider bargain territory.
But it’s worth noting that a very low P/E could be a sign that something is wrong.
Barclays
Barclays has a P/E ratio of just 4.4. Although the bank had litigation and conduct charges of $500m in Q1, that’s not going to sink this FTSE 100 giant. In fact, total income for the first quarter rose 10% to £6.5bn. And 2022 was a stellar year for the bank, with pre-tax profits rising to £8.4bn.
Ok, the UK doesn’t have a positive economic forecast, but I think the bank’s prospects are pretty good despite this. An economic downturn could definitely be bad for business.
But higher interest rates mean higher margins for banks — both in terms of interest on deposits with the Bank of England and money lent commercially. Barclays is also relatively diversified, and has a strong investment arm.
Lloyds
Continuing the banking theme, Lloyds is a personal favourite of mine. It has a P/E ratio of 5.9 and offers a decent 4.6% dividend yield.
However, the bank is heavily exposed to the property market. In fact, 71% of Lloyds’ loans are mortgages. So there may be some short-term pain if higher rates dampen demand for mortgages. However, it is equally the case that higher rates will increase margins.
Lloyds wants to purchase 50,000 homes over the next decade under the brand name of Citra Living. I’m quite excited about the bank’s move into the property rental market. This will increase the bank’s exposure to property, but not quite in the same way.
The lender is also diversifying into insurance, which I see as a good development.
Rio Tinto
The Rio Tinto share price has jumped up and down this year amid an uncertain economic environment engendered by inflation, Russia’s invasion of Ukraine and Covid-19.
The firm currently has a P/E ratio of just 5.5 after the miner reported huge profits of £30.8bn in 2021. And 2022 looks like another good year as commodity prices remain high.
One issue is Chinese lockdowns. Demand for commodities soften during the April lockdowns in China. Going forward, higher commodity prices may depend upon Beijing’s approach to Covid-19.
I’ve already bought Barclays and Lloyds, and I’m looking to add Rio Tinto to my portfolio. However, I’m keeping a close eye on events in Shanghai and elsewhere in China.
