Looking at a company’s price-to-earnings (P/E) ratio is a tool I use when looking for cheap FTSE stocks to buy.
Both of the following FTSE 100 shares trade on P/E ratios of below 7 times. Are they brilliant bargains or just investor traps?
Barclays
Price: 169p per share
P/E ratio: 6.5 times
Investing in Britain’s banks such as Barclays (LSE: BARC) is highly risky as the UK economy toils. GDP forecasts are being downgraded thick and fast with the British Chambers of Commerce (BCC) the latest to sound the alarm.
On Thursday, the business group trimmed its 2022 growth forecasts to 3.6%, from 3.5% previously. It also said it expects inflation to soar to 10% in the fourth quarter. It follows forecast cuts by the Organisation for Economic Co-operation and Development (OECD) midweek and warnings of zero growth in 2023.
In this climate, Barclays investors need to consider the prospect of soaring loan impairments and a slump in revenues.
On the plus side, a backdrop of rising inflation means that the Bank of England should keep hiking interest rates. This will boost profits Barclays makes on lending by widening the rates it offers to borrowers and savers. Indeed, the BCC predicts that benchmark rates will rise to 2% by the end of 2022, and 3% by the close of next year.
Still, it’s my opinion that the odds are stacked against Barclays in the near term. And the long-term outlook is quite spooky too as competition ramps up in the UK banking sector. I’m happy to avoid it right now.
Glencore
Price: 539p per share
P/E ratio: 5 times
Commodities business Glencore (LSE: GLEN) could experience significant bumpiness over the next 12-18 months. But I’d still buy it because its outlook for the rest of the decade looks quite thrilling.
Like Barclays, Glencore is a cyclical business that is highly sensitive to broader economic conditions. This FTSE 100 firm both produces and deals in raw materials all over the globe. The impact of soaring inflation on eonomic growth — and by extension on commodities demand — threatens to be severe.
This isn’t the only threat to Glencore in the near term either. Fresh Covid-19 lockdowns in Shanghai announced today illustrate the tough fight that commodities glutton China is having to contain a new wave of the pandemic.
All that being said, I’d buy Glencore in anticipation of a new ‘commodities supercycle’ over the next decade. The business can expect demand for its copper, cobalt, lead and zinc to soar as electric vehicle sales accelerate.
Consumption of its ferroalloys and iron ore, meanwhile, looks set to balloon as infrastructure spending picks up across the globe (and particularly so in emerging markets). Glencore’s vast operations put it (and its shareholders) in the box seat to exploit these trends.