The FTSE 100 is packed with brilliant bargains. But London’s premier share index is also loaded with value traps just waiting to catch investors out.
Here are three stocks I see as high-risk that I’m avoiding like the plague.
Lloyds Banking Group
Higher interest rates are critical for bank profits. The higher the Bank of England’s benchmark is, the larger the margin between the rates banking firms offer to savers and to borrowers.
In the UK, policymakers seem tipped to keep raising rates aggressively. This is good news for stocks like Lloyds (LSE:LLOY).
This week interest rates rose again, to 3.5%. And according to the British Chambers of Commerce they will climb as high as 5.25% in 2023.
But in my view the benefits brought by higher interest rates are offset by the risk of rocketing loan impairments. Lloyds has already set aside £1.05bn to cover the possible cost of bad loans. I expect more profit-rocking charges could be coming as the UK economy sinks.
Lloyds’ share price is cheap. At 45.5p the bank trades on a price-to-earnings (P/E) ratio of 6.2 times for 2023. This rock-bottom valuation reflects the risks to its profits as Britain enters what could be a long recession.
Imperial Brands
Tobacco stocks have traditionally been popular safe havens for investors. The addictive nature of their products made them reliable earnings generators even during tough economic times.
Major producer Imperial Brands (LSE:IMB) carry an extra later of protection too. Names like Winston and Gauloises enjoy excellent brand power. This enables them to effectively defend (or even gain) market share.
These twin qualities could bode well for the company next year. However, as someone who invests for the long term I’m not interested in buying Imperial Brands. There’s a steady flow of anti-tobacco legislation that threatens future earnings.
This week, for example, New Zealand passed a law banning anyone born in or after 2009 from buying tobacco. The minimum age will thus rise over time until tobacco sales are inevitably phased out. Other countries are also aggressively legislating to reduce smoker numbers.
The development of vaping and tobacco heating products provides a new growth channel for cigarette companies. Imperial itself has rolled out its Pulze and iD sticks in recent years. But huge uncertainty remains over the earnings potential of these new-age technologies.
Consequently I’ll avoid Imperial Brands shares despite their low P/E ratio of 7 times for FY23.
J Sainsbury
Sainsbury’s (LSE:SBRY) is the final FTSE 100 stock I’m avoiding at all costs.
Historically, food retailers like this served as lifeboats for investors in times of economic distress. But the margins of Britain’s established grocers are being crushed by a mix of soaring costs and intensifying competition.
Today Sainsbury’s also sources considerable income from discretionary items, both in-store and from its Argos general merchandise operation. This adds another layer of danger in a time when consumers are tightening their belts.
J Sainsbury’s fast-growing delivery service offers plenty of profits potential. But I believe this is overshadowed by the risks the company poses to investors. Not even its rock-bottom P/E ratio of 10.5 times for 2023 is enough to encourage me to invest.
