I’m looking to top up my portfolio by investing in cheap shares that have scope to fight back over the next few years. I reckons there are plenty that fit the bill on the FTSE 100 today, so that’s where I am beginning my hunt.
It’s odd to think of the FTSE 100 as offering good value, given the index is trading at an all-time high. Yet not all of its members have rocketed.
There’s loads of stocks I’d like to buy
Mining stock Anglo American instantly grabs my attention, as its shares trade at just 5.4 times earnings. Given that 15 times is seen as good value, it looks cheap. Better still, it should yield 7.41% this year.
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It should benefit from rising demand as the Chinese economy reopens, but the risk is that a global recession will hit demand. The Anglo American share price is down 10.32% in a year, but it’s up 102% over five years. I’m taking a 10-20-year view, which allows me to look beyond today’s uncertainty. Over that length of time, this stock looks a buy.
Incredibly, Barclays is even cheaper, trading at just five times earnings, with a price-to-book value of just 0.4 (where 1 is considered fair value). Rising interest rates allows banks to widen their net interest margins, which is positive, but the recession is a big negative if it leads to a sharp rise in debt impairments.
The Barclays yield is relatively low at 3.23% but it is forecast to hit 4.8% next year and still have ample cover of 3.8. I would expect more progression to come plus some share price growth when investor sentiment picks up.
B&Q and Screwfix owner Kingfisher also catch the eye trading at just 7.8 times earnings, while yielding 4.5% covered a healthy 2.8 times. It performed strongly during lockdown when housebound DIYers got to work, but has slipped since.
The Kingfisher share price is down 13.48% over one year and 21.68% over five years, but I see this as a buying opportunity. Again, the recession and falling house prices may hit demand, but over a five-year view, this is an exciting recovery play.
I’m looking for income and growth
Housebuilder Persimmon is also cheap, trading at six times earnings, and the uncertain housing market plays a part in that too. The dividend is being rebased so the stock will yield a lot less than the 15.76% quoted online going forward. I still expect healthy shareholder payouts though.
The next year or two will be bumpy but I want to buy before the recovery, rather than afterwards.
Paper packaging products group DS Smith also looks cheap trading at just 11.1 times earnings and yielding a healthy 4.39%, covered twice by earnings. Its stock is down in 11.5% over one year and 22.76% over five, but as a contrarian investor I find this tempting rather than a turn off.
A major recession will prove a headwind as cash-strapped shoppers will spend less online, hitting deliveries and demand. The company also faces industrial action. That’s why it’s cheap, Fools! But I think DS Smith has the financial resilience to recover from today’s troubles.
I need to do my due diligence on these five stocks before buying them, but all look good value, according to my criteria.
