A stock isn’t a bargain just because the price is low. A company can actually be overvalued even when it’s a penny stock. Yet if an investor can combine a low share price with a low valuation or a high future trajectory, it could be a great purchase. Here are two FTSE 100 shares that I feel have good potential going forward.
The perks of falling inflation
Tesco (LSE:TSCO) is the largest UK supermarket by maket share. The share price might be up by 6.5% over the past year, but the business has struggled due to high inflation.
Back at the start of the year, we had inflation at a 40-year high. This was driven in a large way by the price of basic food. This hurt Tesco and other supermarkets as they had an impossible dilemma. They could try to keep demand high by reducing profit margins and not raising prices as much. Or they could keep margins the same but increase prices, risking lower revenue as customers went elsewhere.
We appear to now be turning a corner. Inflation is falling, and the latest trading update from the business showed that sales were moving higher. The half-year results are due out in a few weeks and this will provide a key indication for investors on how the business is coping.
I believe the stock is a cheap buy at current prices as I feel there’s still a lot of pessimism built in to it around inflation concerns. Based on the economic data, I expect a solid H1 performance from Tesco. On that basis, the stock could jump, with the cloud finally being lifted.
Share price not keeping up with earnings
The Barclays (LSE:BARC) share price is down 10% over the past year. Trading at just 150p, we’re not far off the 52-week lows of 128p.
The earnings for the company have now easily recovered the dip seen during the start of the pandemic. Profit before tax for last year was just above £7bn. Given that the H1 results just out showed profit before tax at £4.6bn, I think this full year could be even better.
Yet with a price-to-earnings (P/E) ratio of just 4.9, I believe it’s the share price that’s too low. It’s unlikely to stay like this for a long time, as value investors will step in and buy. This should return the stock to a fairer P/E ratio around 10 — at least, that’s what I think.
Sure, the business isn’t perfect. Reports this week suggest the bank is considering a sale of the merchant payments division. I think this would be a bad move, given the steady and low-risk nature of this area.
I believe investors should consider buying both FTSE 100 stocks as value plays for potential share price gains in the coming years.
