Earlier this morning (13 May), I screened the FTSE 100 index for stocks within 5% of their year lows. Believe it or not, only three stocks came up.
Here, I’m going to look at two of those three stocks. Should investors consider buying these out-of-favour names while the Footsie is near all-time highs?
A value investing opportunity?
The first stock that came up on my screen was telecoms giant BT Group (LSE:BT.A). It was just 4.3% off its 12-month low price.
Now, this stock has really underperformed recently. And that doesn’t surprise me. In recent years, the telecoms company has generated very little revenue growth while network build-out costs have been high.
Meanwhile, it has been carrying an enormous pile of debt (around £20bn), which isn’t ideal in a higher-interest-rate environment.
Given the lack of top-line growth, and the debt pile, this is not a stock I’d personally buy. I prefer to invest in high-quality growth companies.
However, if I was a hard-core value investor, this stock could potentially interest me.
Currently, it trades on a forward-looking price-to-earnings (P/E) ratio of just 5.6. That’s a huge discount to the market.
Meanwhile, its dividend yield is about 7.5% right now. This means that I could be paid to wait for a potential rebound in the share price.
Of course, neither dividends nor a share price recovery are guaranteed here. Looking ahead, the company’s debt pile could put pressure on both, especially if interest rates were to remain high, or move even higher.
Looking at the stock through a value investing lens, however, I do think it looks interesting.
Huge dividend increase
The second stock on my screen was Premier Inn owner Whitbread (LSE: WTB). It was just 2.9% off its lows of the past year.
Now, this is a stock that I could be tempted to buy. It’s much more in line with my investing strategy.
For a start, the company is generating solid growth. For the 12-month period ended 29 February 2024, revenues came in at £2.96bn – up 13% year on year.
Second, it’s quite profitable. Last financial year, Premier Inn UK delivered a return on capital employed of 15.5%.
Another thing I like about this stock is that dividends are rising rapidly. Recently, the company hiked its payout by a whopping 26% (the yield is 3.2% right now).
Given that the stock trades on a P/E ratio of 14 with a free cash flow yield of 6%, I think it has a lot of appeal.
The biggest risk here, in my view, is the lower-income consumer. In the current financial environment, a lot of these consumers are running low on disposable income.
I think this risk is the main reason the shares have underperformed recently.
But I don’t believe the company would have increased its dividend by 26% if it was that worried about consumer spending.
So, I reckon the share price weakness here could be an opportunity.
