I think these FTSE 100 stocks look cheap after yesterday’s crash

After a mini crash so far this week, Jonathan Smith points out a couple of FTSE 100 stocks he thinks have been oversold in the process.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

So far this week, the FTSE 100 has struggled. It opened on Monday around 7,130 points, but closed yesterday around 6,930. This drop of 200 points represents a fall of around 2.8%. Obviously as an index, there were companies that fell a lot more than 2.8%. Given the reason for the crash, I actually think this is a good opportunity to buy the dip in the FTSE 100 stocks.

Why did the stock market crash?

The main reason of concern for investors is the potential for rising inflation. Over the past year, UK inflation has been averaging around the 0.5%, so not too much of a worry. However, in recent Bank of England meetings, inflation expectations have been rising. One factor involved in this is the large amount of stimulus that is being pumped into the economy, both from a fiscal and a monetary position. 

The aim of this is to get the economy going again. This is fine, but one downside of a growing economy is higher inflation. Unfortunately, higher inflation leads to higher interest rates. Higher interest rates make it more expensive for FTSE 100 stocks to raise new debt. It also means consumers might decide to save rather than invest if interest rates are high.

The above is a long chain reaction, a bit of a slippery slope. Yet the stock market is very forward thinking, and so yesterday was a case of some investors getting a little bit scared of the potential further down the line, and selling out.

Why I think some FTSE 100 stocks look cheap

I completely accept that rising inflation coupled with rising interest rates could hurt the FTSE 100 index. But we aren’t there yet, and not even close. I think the mini crash this week is an overreaction. Some FTSE 100 stocks have seen a sharp drop that I don’t feel is valid.

For example, Flutter Entertainment saw its share price fall 6.7% so far this week. Is this an overreaction? It recently released strong Q1 results. Revenue rose 41% in the first three months to March.

In terms of debt levels, 2020 results show that it has risen to circa £2.8bn. I think this is the reason for the large fall this week, as investors are concerned about financing this debt with higher interest rates.

On closer inspection though, this is only a leverage ratio of 2.3x, with a commitment to reduce it to 1-2x in the medium term. Therefore, I think this FTSE 100 stock looks cheap.

Another stock that took a hit was Rightmove. This is more logical, as higher inflation and rates will make it harder and more expensive to buy a home. But does this warrant a 5% fall in two days? I don’t think so. The momentum of the housing market is very strong. There’s also a good correlation between the state of the economy and the housing market. 

With UK GDP for March beating expectations at 2.1% (versus 1.4% growth expected), I think the property marketplace serviced by Rightmove will increase in demand, not decrease. As such, I also think this FTSE 100 stock looks cheap right now.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK owns shares of Flutter Entertainment. The Motley Fool UK has recommended Rightmove. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

How much would I need to invest in income shares to earn £300 a month?

What kind of lump sum would be required to earn £300 a month by taking advantage of some of the…

Read more »

Investing For Beginners

Up 31% in a month, could this FTSE 250 stock be getting bought out?

Jon Smith takes a look at speculation that's pushing the share price of a FTSE 250 share higher and considers…

Read more »

Investing Articles

Here’s how I’d follow Warren Buffett to start building passive income in 2025

Ben McPoland highlights one FTSE 250 firm with a strong competitive edge that he thinks can continue rewarding investors with…

Read more »

Investing Articles

Burberry shares: undervalued FTSE gems that are ready to rocket?

Burberry shares soared at the beginning of the week as the takeover rumour mill went into overdrive. Is Paul Summers…

Read more »

US Stock

Here are the latest share price forecasts for S&P 500 giant Amazon

Amazon has generated monster gains for investors over the last decade. And Wall Street analysts believe the S&P 500 stock…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »