If I had to choose three seriously undervalued FTSE 100 shares today, based on fundamentals, what would they be?
Well right now, the Footsie boasts 16 stocks with a single-digit price-to-earnings (P/E) ratio and 10 stocks with a P/E of less than seven. Let’s start there and see what unloved gems we can uncover.
Gas powered
The cheapest stock is Centrica (LSE: CNA). The shares cost 133p for a P/E of only 1.93. This is perhaps no surprise as the British Gas owner made headlines this week for making 10 times the profit it did the year before.
Record earnings for a household utility in a cost-of-living crisis is never a good look and will invite heavy scrutiny of British Gas earnings.
Achieving billions of profits will not go down well politically when people are struggling to afford energy bills. The firm may be hit with windfall taxes.
Moreover, the Centrica share price surged over 400% as gas prices rose. I don’t think there’s as much value here as its P/E might suggest.
Banking giant
The second FTSE 100 stock to catch my eye is banking giant HSBC (LSE: HSBA). The 641p share price values the firm at a P/E of just 5.72.
While cheap valuations are commonplace in an industry with poor growth prospects, HSBC offers a little more than the other Footsie banks.
Together, Hong Kong and mainland China make up over 50% of the bank’s revenues. China, remember, is growing GDP at 5% a year and still has plenty of catching up to do with its Western peers.
Its exposure to China is also likely the bank’s biggest risk. I think we’re all hoping the rumoured conflict in the South China Sea amounts to nothing but it’s a cause for concern for HSBC.
This better growth story is paired with solid management. I was impressed with HSBC’s acquisition of Silicon Valley Bank’s UK customers last year for a pound coin. I think I’d open a position with spare cash.
Up in the air
British Airways owner IAG (LSE: IAG) is the last stock to catch my eye after tumbling to a near 52-week low. The share price of 147p means it’s trading at a P/E of just 4.37.
Shares in the airline dropped 75% during the pandemic. Okay, no surprise there. But the era of Covid preventing us from booking trips abroad seems a distant one now and rivals like EasyJet and Jet2 have been rocketing while IAG has stayed pretty much still.
IAG’s biggest issue is how many of its planes fly long-haul. With air travel fares rising, it seems fewer travellers are willing to shell out on these long-distance trips.
Warren Buffett is known for hating airlines, and I can’t say I’m the biggest fan either. But in this case, the value looks very good. I’ll add IAG to my watchlist.
In summary, all three of these Footise stocks look dirt cheap at first glance, but I’d only buy one. I’ll look at this as a timely reminder to dig deeper than looking at a very low P/E ratio.
