These are the FTSE 100 stocks I expect to rally: Melrose, Hikma, and…

Some of my favourite FTSE 100 stocks from the past few years are trading very close to fair value.

These are companies like Barclays, Lloyds, IAG, and Rolls-Royce. All of these have more than doubled in value — or by 10 times — since I added them to my portfolio.

However, I don’t believe this companies will significantly outperform the stock market in the coming years.

And what I real want to do is… significantly outperform the stock market in the coming years!

With that in mind, I’m looking for new areas of value to take my portfolio forward in the coming years.

Value on the FTSE 100

Value stocks don’t need to have beaten-down share prices. It’s just about looking at the valuation data and finding relative value.

For example, Melrose Industries stock has surged over the past six months — lots of stocks have, as six months ago was a global low following Trump’s Liberation Day tariffs.

However, the stock still looks undervalued to me. It’s currently trading around 17 times forward adjusted earnings.

That’s only cheap because management are guiding towards more than 20% annualised earnings growth through to 2029.

In turn, this leads us to a price-to-earnings-to-growth (PEG) ratio that sits below one. This is a typical indication of good value.

For me, the PEG ratio is very important. But it’s a metric that should be used in relative terms.

For example, Melrose’s PEG ratio is 68% lower than Rolls-Royce, even though they’re both active in the same sectors and have strong pricing power.

In fact, Melrose has a sole-source position for 70% of its sales. That gives it a huge economic moat and hard-to-match pricing power.

The risks? Well, it’s worth remembering that the aerospace industry has had severe supply constraints in recent years.

Nonetheless, I certainly think it’s worth considering even as it gets closer to its average share price target.

What else?

Well, one stock that breaks the PEG rule to some extent is the London Stock Exchange Group.

It’s one of the world’s most important data and analytics companies — as well as a stock exchange.

It also has some of the strongest margins on the FTSE 100. In fact, the EBITDA (earnings before interest, tax, depreciation, and amortisation) margin is nearly 50%.

However, the PEG ratio sits around 1.8 with investors happy to pay more for a company with strong margins.

Nonetheless, it could still be undervalued by around 35%, according to the consensus of analysts.

And then there’s AstraZeneca — the largest company on the index.

It’s come under some pressure this year, partially due to the US administration’s position on the pharma sector and tariffs.

However, it does appear to be well positioned to weather any storm.

Its PEG ratio sits at 1.2, which looks like a nice 35% discount for the sector.

And in pharma, there’s also generics manufacturer Hikma Pharmaceuticals. It’s trading with a PEG ratio around 0.85 when accounting for debt and dividends.

I think all of these are certainly worth considering.

The post These are the FTSE 100 stocks I expect to rally: Melrose, Hikma, and… appeared first on The Motley Fool UK.

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James Fox has positions in AstraZeneca Plc, Barclays Plc, Lloyds Banking Group Plc, London Stock Exchange Group Plc, Melrose Industries Plc and Rolls-Royce Plc. The Motley Fool UK has recommended AstraZeneca Plc, Barclays Plc, Hikma Pharmaceuticals Plc, Lloyds Banking Group Plc, Melrose Industries Plc, and Rolls-Royce Plc. 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.

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