I love searching for underpriced stocks to buy. If things go well, investors will eventually recognise the excellent value these stocks provide, piling in and sending their share prices higher.
Today, two FTSE 100 shares in particular have caught my attention: Imperial Brands (LSE:IMB) and JD Sports Fashion (LSE:JD.). Their price-to-earnings (P/E) ratios of 10 times or below suggest — for one reason or another — that they are worth serious consideration.
But in reality, are these FTSE stocks brilliant bargains or classic value traps?
Industry-leading value
At £26.53, Imperial Brands shares carry a forward P/E ratio of 9.9. That suggests excellent value compared to the broader tobacco sector, whose ratio sits at 14.5.
The company owns some of the world’s leading tobacco brands. These include JPS and West, labels that enjoy incredible pricing power. Imperial Brands is also investing heavily in fast-growing combustibles, and owns the blu vape and Pulze heated tobacco devices.
The result? Sales are still growing even as wider tobacco demand falls. But the red lights are flashing and revenues are under pressure, growing just 1.8% in October-March. I think investors could be in for a shock in the months ahead as cigarette usage fall sharper than many industry insiders predict.
FTSE 100 rival British American Tobacco announced yesterday (2 June) industry volumes were down 2.5% in the first half. That was sharper than the 2% fall the firm itself had been predicting. But it’s not just sales of traditional products that are in increasing danger. It’s possible that sales of vapes and so on could also wildly disappoint..
According to Hargreaves Lansdown,
There is some evidence to suggest that these products pose a reduced health risk compared to cigarettes, but they are coming under increasing scrutiny, with some products already banned in the US.
Are these risks adequately reflected in Imperial Brands’ share price? I’m not convinced.
Sporting hero?
Could JD Sports Fashion be a better value stock for me to buy? It’s even more attractive based on its forward-looking P/E ratio. This is 8.4 times, some distance below the long-term average of 16-17. Time to pile in?
Possibly, although the risks here also deserve serious consideration. Sales have picked up more recently in key markets like the US, though questions swirl over whether this can continue as inflation spikes again. Looking longer term, I’m also mindful of the growing popularity of Chinese sportswear brands and the danger this poses to JD Sports’ key partners like Nike and Adidas.
Yet, on balance, I believe the shares represent an attractive growth opportunity. The outlook for the broader athleisure market remains robust as consumer lifestyles and tastes evolve. Grand View Research analysts expect the global market to grow at an annualised rate of 9.9% between now and 2033, to $892bn.
Encouragingly for investors, JD Sports has significant exposure to North America and Asia following heavy recent expansion. These are the world’s largest and fastest-growing athleisure markets respectively. With a focus on the white-hot premium market, too, there’s a good chance in my view that the firm significantly outperforms the market.
It’s not without risk. But at just 84.1p, I think this could be one of the FTSE 100’s best recovery stocks to buy.
Should you invest £5,000 in Imperial Brands Plc right now?
When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Imperial Brands Plc made the list?
Royston Wild does not hold any positions in the companies mentioned.
