There are plenty of FTSE 100 stocks that I’d buy for dividends. But there aren’t all that many I’d buy for their value.
That might sound strange, because there are lots of analysts’ notes out there suggesting British stocks are undervalued.
And I thought the same way for a while, but I’ve changed my mind of late. Why? Because of growth.
The UK economy isn’t projected to set to world on fire in the coming years. I really hope it will, but the forecasts don’t agree.
So, many FTSE 100 stocks may appear cheap today. But when we take growth prospects into account, they’re really not. The economy isn’t expected to grow quickly, and neither are they.
So, today I’m looking at five stocks that I’d buy because they’re undervalued.
PEG is underrated
The price/earnings-to-growth (PEG) ratio is a useful metric in stock valuation. It blends the current price-to-earnings (P/E) ratio with expected earnings growth.
In fact, I’m increasingly thinking it’s the most important tool I have to assess stocks.
Represented as P/E divided by the earnings growth rate over three-five years, a PEG ratio below one may indicate an undervalued stock regarding its growth potential.
However, it’s crucial to recognise the limitations of the PEG ratio. One issue is its assumption of a linear relationship between P/E and growth.
It’s also the case that the PEG ratio is calculated using forecast earnings for the coming three-five years. And these forecasts can be incorrect.
But a PEG ratio provides a comprehensive snapshot of a stock’s attractiveness that prudent investors consider alongside other factors for a well-informed investment decision.
Only five!
Surprisingly, there are only five stocks on the FTSE 100 that have PEG ratios below one. That could mean 95 stocks either trade around fair value or are overvalued when adjusted for growth!
However, I’d add that the PEG ratio is primarily designed for evaluating growth stocks. It may not be as suitable for assessing dividend stocks. And lot of FTSE 100 stocks are mature, dividend-paying stocks.
Nonetheless, it’s still an important finding. Very few FTSE 100 stocks appear to represent good value when adjusted for growth.
So, what are the five stocks that I think scream ‘buy me’ for my own portfolio?
| PEG | |
| Tesco | 0.48 |
| Rolls-Royce | 0.48 |
| Lloyds | 0.53 |
| Marks & Spencer | 0.82 |
| Intercontinental Hotels Group | 0.97 |
The data suggests that Intercontinental Hotel Group is trading near fair value but could have some upside, despite surging 36.5% over the past 12 months.
The PEG ratio also suggests that Marks & Spencer is undervalued by 18% despite being one of the strongest performing stocks on the index this year — it’s up 110% over 12 months.
Meanwhile, these PEG ratios also suggest that Tesco, Rolls-Royce, and Lloyds are undervalued by half.
So, while I already own shares in Rolls-Royce and Lloyds, I’m looking to add the other three to my portfolio.
