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The world is still waiting for the US election to go sour, threatening market volatility. UK shares have not escaped the consequences, with some notable suffering in recent weeks.
This past weekend, I took stock of FTSE 100 stocks in my portfolio. I found three that I feel are trading well below their fair value.
Here, I will highlight why these rates look attractive to me. If I wasn’t already invested, I would consider buying these big names in November.
Taylor Wimpey
Taylor Wimpey (LSE: TW) is one of the most affordable housebuilding stocks in the FTSE 100. Now at £1.47, the share price is down 13% from this year’s high of £1.68.
Despite the housing market’s sensitivity to inflation, it benefits from strong demand for affordable housing in the UK. With supportive government policies (such as the Help to Buy program) and ongoing housing shortages, homebuilders remain well positioned for long-term demand.
It also has a strong equity track record, which attracts income-oriented investors.
The main downside is the exposure to interest rates, which has an impact on mortgage purchases and, as a result, the demand for new homes. Rising costs of materials and labor can also squeeze profits.
It currently trades 32.8% below fair value using the discounted cash flow (DCF) model, with a price-to-earnings (P/E) ratio of 21.2.
Lloyds Banking Group
Lloyds (LSE: LLOY) fell last week after unexpected developments in the ongoing dispute over loss of payment protection insurance (PPI). The price has already started to recover but remains close to its lowest level in nearly six months.
Despite economic challenges, its extensive branch network and established product range give it a competitive edge. As one of our largest retail banks, it has a strong position in the domestic market. And, although interest rates remain high, it continues to benefit from better interest rates on lending.
However, exposure to the UK economy means Lloyds is sensitive to economic downturns, including a potential rise in bad debts if customers struggle to repay loans.
It has a low P/E ratio of 7.5 and is undervalued by 55.3% based on the DCF model. It also pays a fixed dividend with a yield of 5.3%, which can attract income-oriented investors.
Reckitt Benckiser
Reckitt Benckiser (LSE: RKT) is often seen as a reasonably priced safety stock, especially for those looking at consumer staples and healthcare. It is not as ‘cheap’ in price as Lloyds or Taylor Wimpey but can deliver attractive returns in the coming months.
Like many companies, Reckitt has been hit by inflation and supply chain issues, particularly in terms of raw materials and transportation. These rising costs can squeeze profit margins if the company can’t pass the cost on to consumers.
This year it faced a high-profile US legal battle related to it Enfamil baby formula, which makes the price much lower. However, last week a Missouri state court judge dismissed the company’s case.
The price is now stable and likely to continue, as revenue is forecast to grow by 11.3% annually going forward. Return on equity (ROE) is estimated to reach 28% in the next three years.
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