The FTSE 100 is packed with shares that look dirt-cheap on paper. However, many of these cut-price stocks are waiting to catch unsuspecting investors out.
Here’s a low-cost Footsie share I’d sell and one I plan to hold onto.
Sainsbury’s
J Sainsbury (LSE: SBRY) would, in days gone by, have been a hot safe-haven stock with investors. The scale of the inflationary crisis, however, has prompted shareholders to offload their holdings.
I’d be tempted to sell any Sainsbury’s shares that I held, too
With consumer price inflation hitting 40-year highs, even demand for food and essentials is slumping. A Which? survey shows that 85% of people are now spending less on groceries. A worrying proportion are also skipping meals altogether to save cash.
Increasing costs are also putting pressure on supermarkets. Sainsbury’s raised staff wages for the second time in 2022 last month. The company’s profits are also being battered by rising energy and product costs as the Ukraine war drags on.
I like the FTSE 100 firm’s rapidly expanding online operation. The potential returns here are huge as the e-commerce sector grows.
Internet sales at Sainsbury’s were up 94% versus pre-pandemic levels during the 16 weeks to 25 June.
But those current issues I mention — along with the long-term problem of steadily-increasing competition — make it a risk too far in my opinion. That’s even though J Sainsbury shares trade on a forward price-to-earnings (P/E) ratio of nine times and a carry a 6.6% dividend yield.
Persimmon
Persimmon’s (LSE: PSN) ultra-low share price during the summar was too good for me to ignore. Even now it continues to offer excellent all-round value. The housebuilder trades on a forward P/E ratio of 4.9 times and carries a splendid 18% dividend yield.
I wouldn’t buy the housebuilder today, although I plan to hold onto my shares. The prospect of soaring interest rates and a subsequent fall in homes demand has tempered my bullishness.
Mortgage costs are soaring because of heightened economic and political uncertainty. Rates hit fresh 14-year highs late last week. And more hefty hikes are predicted, driven also by runaway inflation.
However, I’m holding my Persimmon shares as the long-term outlook for housebuilders remains robust. Weak housebuilding rates mean that Britain’s stock of new homes continues to be low. I believe that when economic conditions improve this supply and demand imbalance will widen sharply again, thrusting home prices higher again.
I also like Persimmon in particular because, unlike most other housebuilders, it manufactures some of its key materials. These include bricks, tiles, timber frames, and wall panels. It even installs ultrafast broadband through its FibreNest division.
This helps reduce risk to the company’s profits. It cuts costs and gives the company better control over the supply chain. This in turn reduces the chances of production targets being missed due to third-party problems.