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I regularly scour the FTSE 100 for cheap shares and even with the index hitting all-time highs, I’m still finding bargains.
The quickest way I know to check whether a stock is good value is to look at its price-to-earnings ratio. Other measures include the price-to-book ratio and discounted cash flow, but this is my first port of call.
Using the P/E, three stocks stand out, but with a proviso. Cheap doesn’t automatically mean it’s a good time to buy. Sometimes there’s a very good reason a stock is in the bargain bin.
EasyJet shares are grounded
I’ve been tempted by budget carrier easyJet (LSE: EZJ) for a while. It looks dirt cheap with a P/E of 7.6, but it’s struggling to hit take-off velocity.
easyJet shares are down 5% over the past year, at a time when FTSE 100 peer International Consolidated Airlines Group has rocketed 103%. easyJet operates in a Europe-focused market, while IAG benefits from transatlantic traffic.
easyJet’s results on 17 July showed pre-tax profits of £286m for the three months to 30 June, up £50m year on year, driven by strong demand and Easter timing.
While that was good news, the shares have plunged lately as French air traffic strikes look set to knock £25m off profits and travellers book later amid global economic worries. Despite these risks, I think it’s worth considering for its long-term comeback potential. But only with a long-term view because given today’s economic turbulence, I think it could face further headwinds.
JD Sports stock is rising
Trainer and athleisure retailer JD Sports Fashion (LSE: JD) also looks great value with a P/E of 7.9, but its shares have taken a real battering. They’re down 25% over the last year, and that’s despite a 60% climb in the last six months.
I bought the stock 18 months ago hoping to participate in its recovery, and I’m now back in the black and hoping for further gains. Yet I may have to be patient.
Consumers remain under the cosh, including in the US, where JD Sports now makes almost 40% of its sales. Tariffs remain a concern. Despite that, I think today’s low valuation provides a potential entry point for investors prepared to ride out the ups and downs to consider. Which is exactly what I’m planning to do.
WPP is a FTSE 100 falling knife
Media and advertising group WPP (LSE: WPP) is the cheapest of the three with a P/E of 7.3. But I advise extreme caution if tempted.
The WPP share price is down 53% over the last year and 80% from its early 2017 peak. Problems came to a head with the departure of the group’s charismatic but controversial driving force Martin Sorrell in April 2018, and it’s been bad news all the way since.
The company has been hit by the economic slowdown, and now from the potential threat posed by artificial intelligence, which may allow clients to produce ad campaigns cheaply in-house.
WPP is now the fastest falling knife on the FTSE 100. The idea of grabbing it today strikes me as seriously dangerous. I love a bargain, but struggling companies take a long time to turn around. It’s too early to consider buying, in my view. Of the three, JD Sports is my favourite to consider.
This story originally appeared on Motley Fool
