I’ve been looking for genuine value stocks in the FTSE 100 — a more rewarding task than you might expect, after a five-year bull run.
Although the FTSE 100 as a whole has an average P/E of 17, and dividend yield of just 2.8%, not all of its member companies enjoy such rich valuation.
Indeed, I’ve screened the FTSE 100 using a set of criteria aimed at highlighting true value stocks, and have managed to find three firms that qualify under my search criteria, which highlighted shares with a P/E of 12 or lower, above average yields and low price-to-book ratios.
1. Barclays
Barclays (LSE: BARC) (NYSE: BCS.US) has had a poor start to 2014. The bank’s share price has fallen by 20% from its January peak of 296p, and its shares currently trade on a price-to-tangible book ratio (P/TB) of just 0.85. This gives Barclays a theoretical liquidation value of 283p per share — 18% above its current share price of 239p.
I rate Barclays as a strong buy, and it looks cheap on other measures, too. It currently trades on a 2014 forecast P/E of just 8.4 and offers a prospective yield of 3.9%, based on analysts’ consensus forecasts.
2. J Sainsbury
J Sainsbury (LSE: SBRY) announced this week that its nine-year run of continuous sales growth ended in the final quarter of last year. Despite this, the firm’s finances are in good shape, and its 38% net gearing is significantly lower than Tesco (52%) and Wm. Morrison Supermarkets (59%).
Sainsbury’s also looks cheap on other measures: its trailing dividend yield is 5.5%, while its trailing P/E ratio is just 10. As a final sweetener, the supermarket trades on a book value of 1, which suggests that its valuation is firmly underpinned by its extensive property portfolio.
3. HSBC Holdings
HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US) is one of my major personal shareholdings. Although its valuation isn’t quite as low as that of Barclays, I believe it could offer potential upside of 14% plus a 5% yield over the next twelve months.
HSBC’s 2013 earnings per share of $0.84 are expected to rise by 14% to $0.96 in 2014. If the bank maintains its undemanding current P/E of around 12, that means its share price could also rise by 14% over the next year, in addition to its prospective yield of 5.4%, giving a potential gain of almost 20%.