In my opinion, many FTSE 100 shares represent great value right now. Valuations are low, but performance is still good.
The British blue-chip index has been unpopular for a while, and it’s not just reflective of the downward pressure we’ve seen on markets over the last year.
In fact, UK stocks have been largely unpopular since the Brexit vote that created considerable uncertainty about the future of the British economy and its access to EU markets. British banks have arguably been unpopular for longer than that.
But eventually, UK stocks will start gaining. So, here are two FTSE 100 stocks I’d buy on the dip.
Lloyds (LSE:LLOY) was one of the biggest casualties of the financial crash, but partially thanks to former CEO Antonio Horta-Osorio, the bank is well and truly back on track.
Horta-Osorio reduced the bank’s exposure to risky operations and that’s why Lloyds looks like a solid investment today. He was even knighted for getting the balance sheet looking healthy again.
It currently has a price-to-earnings (P/E) ratio of just 5.8. That’s very low and it’s even cheaper than most of its peers, with the exception of Barclays.
Lloyds is very focused on the property market. In fact, 71% of loans are mortgages. I’m pretty bullish on long-term demand for housing in the UK, so I rather like this weighing, although I appreciate there may be some short-term challenges amid a cost of living crisis and soaring inflation.
Interest rates are also going up, which will help margins. It’s worth remembering that rates have been incredibly low over the past decade. So a new, higher-margin environment, should be good for banks.
Diageo (LSE:DGE) was recently downgraded by Deutsche Bank, which argued that the drinks maker was “due for deceleration” and said it thought the US spirits market would slow in the coming months as living costs rise.
As a result, the stock fell. But broadly, it’s been doing pretty well since the pandemic. So, this isn’t a long-term dip like Lloyds, just a blip, which I think represents a buying opportunity.
Despite Deutsche Bank’s downgrade, I’m bullish on Diageo. And there are multiple reasons for this.
First, I don’t think there’s a perfect correlation between economic downturns and alcohol consumption. In fact, on many occasions, it’s gone the opposite way.
Also, in its recent January update, the UK-based drinks giant said that foreign exchange rates negatively impacted earnings. But exchange rates should be working in its favour now.
At the beginning of the year, £1 was worth $1.35. Now it’s worth $1.20. In fact, it’s even been as low as $1.18.
It’s also got defensive qualities due to the strengths of the brands it owns. When the economy goes the wrong way, brand recognition can count for a lot.
And finally, western drinks companies are yet to truly penetrate markets in developing countries. But Diageo is in a prime position to do so. With sales in more than 180 countries, this business is truly global. This future grown expectation is why it trades on considerable multiples. It currently has a P/E ratio of 28. Although the forward P/E ratio is 22.
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James Fox owns shares in Lloyds and Barclays. The Motley Fool UK has recommended Barclays, Diageo, and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.