A FTSE 100 share that is the cheapest in its sector

Gabriel McKeown outlines a FTSE 100 share that is the cheapest in its sector and determines whether he should add it to his portfolio.

| 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.

British union jack flag and Parliament house at city of Westminster in the background

Image source: Getty Images

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.

Due to the potential investment opportunities available within the UK market, I often find it helpful to use a filter to scan the FTSE 100. This allows me to quickly identify companies that meet my criteria without wasting time on shares that don’t align with my investment objectives.

I have decided to compare each FTSE 100 company’s price-to-earnings (P/E) ratio to their sector’s average. I highlight companies trading at the lowest 1% of P/E ratios within their respective sectors. This is an efficient method of finding value investment opportunities, as these shares are trading lower than their competitors. It is essential to recognise, however, that these lower valuations could be justified.

The first company identified by my filter was Taylor Wimpey (LSE: TW), the UK’s second-largest residential housebuilder. It has had a tough start to 2022, down 46.1% since the beginning of the year and 60% from pre-pandemic levels. This has resulted in the company reaching the top 1% of lowest-ranked shares in its sector.

Encouraging signs

Despite this, there are more encouraging signs for Taylor Wimpey, with turnover forecast to grow by 6.5%. Earnings per share (EPS) is expected to grow 7.9% in 2023, which is a significant improvement from negative growth. The company has maintained low debt levels, increasing to 3.3% of market capitalisation. This is positive, given the economic pressure faced by the industry in 2020.

Taylor Wimpey now has a P/E ratio of just 5.3, which is forecast to fall further to just 4.9 by next year. The sector average P/E is 5.6, outlining why the company is the lowest ranked in the sector. Despite this, the company’s fundamentals are solid, with a high-profit margin, reasonable cash generation, and significant earning efficiency. This is a very encouraging sign and could be a combination of a discounted share with solid fundamentals.

Dividend potential

Another attractive feature is the current dividend yield of 9.1%, which is forecast to reach 9.8% next year. Furthermore, Taylor Wimpey has a dividend cover ratio of 2.1, indicating that the yield can be comfortably paid using EPS. It has paid this dividend consistently for the last 11 years and grown this level for the previous two years after cutting it in 2020.

However, it’s essential not to ignore why the share has fallen out of favour with the market. Given this company is a housebuilder, there are several sector-wide risks, such as reduced demand and house price falls, both of which could cause the share price decline to continue. Furthermore, despite a significant recovery in 2021, turnover and profit are still below pre-pandemic levels.

Nonetheless, my cheapest-in-sector filter has highlighted an excellent opportunity. I would add Taylor Wimpey to my portfolio once I attain the necessary liquidity.

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.

Gabriel McKeown 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

US Stock

The Nvidia share price falls! Here’s what I think happens next for the S&P 500

Jon Smith reviews the overnight results from Nvidia and explains why this could stall the S&P 500 performance through to…

Read more »

Investing Articles

Down 15% today, is this FTSE 100 share too cheap for me to miss?

JD Sports' share price has tanked after the FTSE 100 share released another profit warning. Is this the opportunity I've…

Read more »

Investing Articles

Up 8% today, is this FTSE 100 growth stock a slam-dunk buy for me?

Halma's share price is soaring thanks to another headline-grabbing trading update. Is the FTSE 100 stock now too good for…

Read more »

Investing Articles

With a P/E ratio of just 10.5 is now a brilliant time to buy a cut-price FTSE 250 tracker?

Harvey Jones says a recent dip in the FTSE 250 leaves the index trading at bargain levels. One stock in…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

To build a passive income flow, I’d follow this Warren Buffett approach

Warren Buffett has set up passive income streams most people can only dream about. Our writer sees some practical lessons…

Read more »

Growth Shares

As the boohoo share price falls, could it become a penny stock in 2025?

Jon Smith outlines some of the recent problems involving the boohoo share price and considers if things could get even…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

Here are the worst-performing FTSE 100 shares over the last 5 years

These five FTSE 100 shares have been complete duds over the last half decade. But is there potential for a…

Read more »

Investing Articles

Nvidia stock has tripled this year! Can it keep rising?

Nvidia's latest sales update showed strong growth and the stock's been on a tear so far in 2024. So is…

Read more »