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These FTSE 100 stocks have rocketed in value during the past 12 months. But I think there’s a strong chance they could underperform after a frothy run-up, leaving them vulnerable to a potential correction.
Uncertain outlook
British American Tobacco (LSE:BATS) has proved an outstanding buy over the last year. It’s shares have surged more than 50%, while its generous dividend policy’s also furnished investors with a tasty passive income.
Can it continue rising though? I’m not so sure, as the firm’s previously attractive valuations have now vanished. Today, it trades on a meaty forward price-to-earnings (P/E) ratio of 12.6 times. This was around eight times 12 months ago.
British American shares have been helped by strong sales performances from its heavyweight brands. Resolute demand for Lucky Strike and its other cartons meant the company raised its sales forecasts over the summer.
But the long-term outlook for the company remains uncertain as new generations turn their backs on traditional cigarettes. Meanwhile, the sales picture for next-generation products like its Vuse vapourisers remains plagued with danger as regulators step up their attacks on their sale and usage, and the way they’re marketed.
Booming demand for weight-loss jabs also poses a substantial threat to British American, with medical studies showing that semaglutide-based medicines such as Ozempic are extremely effective in helping people quit smoking.
My fear is that rising evidence on these drugs’ impact on nicotine addiction could cause British American’s shares to sink. Similar concerns have already hit other ‘sin stocks’ recently. These include drinks makers Diageo and Pepsico (down 16% and 14%, respectively, over the last year).
Not even the tobacco titan’s 5.6% forward dividend yield is enough to encourage me to invest.
Another pricey share
Lloyds (LSE:LLOY) shares have also enjoyed a stunning rise over the past year. Up more than 40%, it’s now the FTSE 100’s most expensive bank based on predicted earnings (forward P/E ratio: 11.1 times).
I find this premium hard to justify given the bank’s poorer growth prospects compared with international operators like Barclays and HSBC. Lloyds faces significant headwinds that could force its share price to reverse sharply at some point.
Falling interest rates are a double-edged sword for retail banks. They can stimulate loans and reduce impairments, as Lloyds’ first-half profits beat showed. But they can also put margins under severe stress. With further Bank of England rate cuts (seemingly) around the corner, I’m fearful over the Black Horse Bank’s future profitability.
My main concern, though, is how it will generate turnover as the UK economy essentially flatlines. As I say, it doesn’t have overseas territories where growth may be stronger, nor an investment bank to stimulate revenues. As a consequence, it faces prolonged weakness as structural issues like a weak labour market, post-Brexit trade rules, high public debt and productivity problems facing Britain.
Like British American Tobacco, I won’t invest as I think the risks facing this UK share far outweigh the potential rewards.
This story originally appeared on Motley Fool
