The FTSE 100 might have hit fresh all-time highs earlier in February, but that doesn’t mean all its constituents are flying high. For a variety of reasons, there are some that could be perceived to be cheap shares right now. Yet just because a share price might look attractive, more research needs to be done to try and spot red flags. Here’s one that I feel investors should consider and also one I’m steering clear of.
Changes are coming
Let’s start with the one that I believe is cheap. I’m talking about BP (LSE:BP). I wrote about the stock earlier this month following a share price rise after news of a large activist hedge fund taking a stake in the business. The 7% jump with Elliott Investment Management getting involved shows investors are happy about a possible restructuring and strategy changes that will be pushed for in the coming year.
Such changes are needed, with the recent 2024 annual results showing a sharp profits drop. The share price might only be down 5% in the past year. But at 447p it’s well off the 52-week highs of 540p and even further off all-time highs! So, from that angle, some would consider it to be cheap.
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Another reason it could be an attractive value purchase is because Elliott clearly see long-term value here. BP CEO Murray Auchincloss announced plans to “fundamentally reset” BP’s strategy, which should help to unlock more profitability going forward. Coming changes include abandoning previous goals of reducing oil and gas output. It’s also looking to fund more profitable oil projects in places like the Middle East.
One risk is that the strategy shift doesn’t go to plan. In that case, the company might still be undervalued, but it could need another shift in direction before finding the right lane to move into.
Numbers not adding up
On the other hand, I’m not convinced that Vodafone (LSE:VOD) is the bargain that some people think it is. The stock is flat over the past year, but is down a whopping 57% over the past five years.
I struggle to see the share price rallying any time soon for a few reasons. To begin with, it’s laden with debt. The latest half-year report showed net debt at €31.8bn. Although this was a fall from the previous year’s €33.2bn, it’s still very high. For perspective, it made a half-year profit of €1.2bn!
Another factor is that the business isn’t really growing. Full-year 2024 revenue fell 2.4% versus 2023. We’ll have to wait and see in May for the next round of reporting, but I struggle to see revenue materially growing. As a result, the share price is unlikely to rally until revenue (and profit) start to tick higher.
Despite my concerns, it’s true that the dividend yield looks very attractive. Even with the recent dividend cut, a 5.63% yield is generous. Some might be happy to own the stock to pick up income and wait for a long-term recovery in the stock. But I’m keeping away and won’t be investing here for the foreseeable future.
