Even with the FTSE 100 already trading near record highs, there are still plenty of cheap stocks to explore. What’s more, these businesses could be primed to thrive, especially as The Economy Forecast Agency projects yet another 13.7% rise in the UK’s flagship index to 11,668 points by this time next year!
Obviously, forecasts should always be taken with a pinch of salt, but they remain useful tools in gauging sentiment. And right now, there are several cheap stocks to consider that could be getting ready for an impressive rally.
Let’s dive in.
Marks & Spencer: a cyber recovery play
Marks & Spencer Group (LSE:MKS) needs little introduction. And while the retailer has been a stellar performer over the last five years, rising by 127%, the last 12 months have been far less impressive. In fact, the share price basically hasn’t moved.
The recent weakness stems from a well-publicised cyber-attack that caused significant operational disruption last year. The impact on the financials was made clear in its latest results, which saw pre-tax profits slip by 28.8%.
But that’s only half the story. After restoring operations, both sales and profits immediately bounced back and returned to growth. So much so that earnings over the next 12 months are expected to be far more impressive, placing the forward price-to-earnings (P/E) ratio at just 11.8 times.
For reference, Tesco’s forward P/E sits closer to 15.3 times – signalling a significant discount against a leading rival.
However, the near-term risk is consumer spending. A potential rise in inflation driven by higher energy prices could squeeze real-terms wage growth and dampen retail activity. But with net interest costs covered 3.1 times by operating profits even after the profit slump, the balance sheet looks well placed to weather the storm.
British Land: cheap property in plain sight
British Land‘s (LSE:BLND) another FTSE 100 stock potentially primed for a strong performance, this time within the commercial real estate sector.
After falling around 20% over the past five years, the shares now trade at a price-to-book ratio of just 0.7. In simple terms, that means investors can buy £1 worth of assets for just 70p and earn a chunky 5.6% dividend yield on top of this.
Full-year results showed EPS rising 1% last year, with net profits expected to grow by 6% in the current financial year and a further 3%-6% annually thereafter. Management’s actively recycling capital into higher-return assets, and the loan-to-value ratio of 39.2%, while slightly elevated, remains within manageable territory.
In this case, the biggest risk is interest rate sensitivity. And it’s why the stock’s trading at such a large discount.
As a highly-leveraged real estate investment trust (REIT), any return to higher interest rates would increase debt costs and suppress the group’s net asset value. And given the inflationary backdrop, that risk’s very real.
The bottom line
Both M&S and British Land are classic examples of quality businesses being underpriced in a pessimistic market. That doesn’t guarantee these cheap stocks will be big winners. After all, they both have significant headwinds to overcome.
But with weak sentiment dragging the share price down to potentially unreasonable levels, both could be nicely positioned to play catch-up, especially if the FTSE 100 does start climbing towards the 11,668 point target over the next 12 months.
Should you invest £5,000 in British Land Plc right now?
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Zaven Boyrazian does not hold any positions in the companies mentioned.
