I’ve looked at what seem to be the ‘best value’ stocks in the FTSE 100 index and I wasn’t surprised to see at the top of the list were financial and natural resources companies.
Why is that? In a low-interest-rate environment, banks and insurance companies tend to struggle. Banks rely heavily on receiving deposits and making loans, thus profiting from the difference, whereas low interest rates minimise this difference. And insurance companies? They sell rate-sensitive products and investments. Generally, the lower the rates are, the more difficult it is for insurance companies to profit.
Natural resources companies struggle because of the overall decline in global manufacturing due to the coronavirus outbreak. China, where materials like metals and minerals are necessary to keep production going, saw its production at a virtual standstill. As a result of this, demand for iron ore, oil, copper and aluminium decreased.
It’s grim, there’s no doubt about that. But in my view, “this too shall pass”. Coronavirus quarantines will end sooner or later (hopefully sooner). Fiscal stimulus measures are being taken by many governments. The US and China trade war seems to be on pause for now. And there’s hope that any global economic recession could end quickly, as well as the panic on global stock markets once the worst is over.
If that happens, I think the companies mentioned below should flourish, and that should be good news for shareholders.
Aviva
Aviva (LSE:AV) is the most undervalued insurance, investment and retirement company listed on the London Stock Exchange.
With its 9% dividend yield, the stock is trading at a low price-to-earnings (P/E) ratio of less than 5, whereas the average P/E ratio in this sector is around 15. Clearly, Aviva’s shares are undervalued compared to its peers.
The company’s price-to-book ratio is about 70%, which gives its shareholders a margin of safety in the unlikely case of a bankruptcy. In theory, if a company goes bankrupt, after all the debts have been paid, the book value is what shareholders would be left with. In Aviva’s case, they would be left with much more than they’d paid to buy the shares.
Moreover, Aviva’s earnings-per-share (EPS) have been increasing steadily. In 2017 and 2018 they rose 7% each time and in 2019 they went up by 8%.
BHP Billiton
And in the natural resources segment, BHP Billiton (LSE:BHP) is a dividend-paying mining industry leader. It specialises in metals, oil and gas, and seems to me to be a bargain right now.
Its revenue relies heavily on iron and copper, which are extremely cheap right now — a factor not in its favour. But at least while factories in Europe are being shut due to quarantine measures, manufacturing activity in China is recovering. Moreover, Rio Tinto and Vale, key competitors of BHP, are cutting their production. Therefore, the key commodities BHP sells do have the potential to rise in value.
In fiscal year 2019, its net profit went up by 90% compared to 2018, whereas its sales revenue was largely flat. This was due to a fall in expenses from discontinued operations and financing costs. Between 2017 and 2018, revenue rose by 20%. Overall, the results over the last two years were impressive, I feel.
Finally, BHP’s dividend yield of over 7% comes with a record low P/E ratio of just over 7.