Are you looking for undervalued blue chips in this depressed market? Some of the lowest P/E picks among the biggest holdings of top fund manager Neil Woodford could be a good place to start.
Right now, Woodford favourites BAE Systems (LSE: BA), Rolls-Royce (LSE: RR) and Legal & General (LSE: LGEN) are all trading on 12-month forward P/Es below the FTSE 100 long-term average of 14.
| Company | Recent share price | P/E |
| Rolls-Royce | 651p | 13.8 |
| Legal & General | 240p | 11.9 |
| BAE Systems | 430p | 10.9 |
Rolls-Royce
As of the end of August, Rolls-Royce was ranked as the 15th largest holding in the 99-strong portfolio of the Woodford Equity Income Fund.
Market sentiment has been moving against the company for some time as a series of profit warnings has unfolded. A trading update on 6 July — the first since the arrival of new chief executive Warren East — saw further weakness, and Woodford “added to the holding progressively throughout the month”. He also bought Rolls-Royce as one of a select group of “high-conviction” blue chips for his new smaller-company-focused Patient Capital Trust.
Rolls-Royce’s shares closed at 802p on the day of the trading update and fell as low as 718p before the month was out. So, you can buy the shares today at a far lower price than Woodford was paying in July. Roll’s Royce’s long-term prospects haven’t changed, and this looks a good opportunity to buy into a company with “world-class technology, a fantastic product suite and a brimming long-term order book”.
Legal & General
L&G ranks at no. 6 in Woodford’s equity income fund, and is also another high-conviction blue chip he’s bought for the Patient Capital Trust.
Woodford has long been averse to investing in FTSE 100 financials, so it’s an added recommendation that L&G is his only blue-chip stock in the sector, and, furthermore, one he views as a “core holding”.
L&G’s attractions were set out in a fund update earlier this year:
“The life insurance industry has historically been opaque and unpredictable but, with a relentless focus on cash generation, Chief Executive, Nigel Wilson, is transforming the business into a much simpler, easier to understand business with strong growth prospects. We remain attracted to the dividend yield [5.8% today] and the prospect of attractive dividend growth in the years ahead”.
Woodford has said he added to his position in L&G during April, May and July — at which times the shares were trading at a higher level than today. So, again, this is share you can now buy at a discount to prices the master investor has been willing to pay.
BAE Systems
BAE Systems is another top Woodford holding on a below-market-average P/E. Indeed, BAE — ranked no. 10 in his equity income fund — has the lowest P/E of the three companies featured in this article.
Defence budgets in BAE’s major markets have been tight over the last few years, but — as with Rolls-Royce — a longer-term view comes into play; something that differentiates Woodford from many in the City.
Over a year ago, Woodford saw BAE as “significantly below fair value” when the stock was trading in the 425p-450p area, but he was also a buyer in the run-up to this year’s General Election, at which time the shares were above 500p. At today’s price were back into the territory of significantly below fair value.