What a year it’s been for investors, with Covid-19 crashing stock markets in the spring, only for them to bounce back in the summer. Now, as the US stock market scales new heights, it’s like coronavirus never happened. As I write, the S&P 500 index stands at nearly 3,625 points, up 395 points (12.2%) in 2020. However, I see bubble-like valuations in many US stocks, notably in the tech industry. It’s been a different tale on this side of the Atlantic, with the FTSE 100 index hovering around 6,391 points, down 1,150 points (15.3%) in 2020. Hence, I’m convinced that cheap shares lurk within the Footsie. Here are two that I’d buy today.
Cheap shares: BP is still a bargain price
It’s been a gruesome year for oil & gas investors, with Covid-19 hitting demand for fossil fuels. The price of a barrel of Brent Crude oil crashed from $70 in January to below $16 in late April. However, it has since recovered to $48 today. This double whammy of coronavirus and falling prices smashed the share prices of oil & gas companies, dumping these stocks in the ‘cheap shares’ bin.
Take UK energy supermajor BP (LSE: BP), whose share price crashed to 25-year lows last seen in the mid-90s. Having hit a 52-week closing high of 504.1p on 6 January, BP’s share price collapsed as the pandemic spread. Amazingly, its cheap shares plunged to close at 193.44p on 28 October, crashing an incredible 61.6%. However, as good news emerged this month, BP’s stock has started gushing again. As I write, it trades at 267.55p, ahead more than 74p (38.3%) in four weeks.
I do believe there is more to come from this stock. Even after its recent rebound, BP is valued at a mere £49.5bn — a shadow of its former self. Yes, this industry faces an uncertain future in the transition to a zero-carbon world. But the group is cutting thousands of jobs and slashing billions from its costs and capital expenditure. Meanwhile, BP shares yield a juicy 6% a year, paid quarterly in cash. That’s more than enough for me to back a brighter future for it by buying its cheap shares today.
GSK keeps getting cheaper
I’ve written about UK pharma giant GlaxoSmithKline (LSE: GSK) rather too often this year. That’s largely because — somewhat counterintuitively during a global pandemic — this particular drug firm’s shares keep on getting cheaper. This confuses me, as GSK is a world leader in vaccines, as well as in immunology, oncology (cancer), HIV/AIDS, and respiratory treatments. Yet in 2020, GSK shares have greatly underperformed those of its larger British rival AstraZeneca.
I’m no seer or oracle, so I can’t predict the future. Then again, I do expect better returns for GSK shareholders in the years ahead. After all, for the past five years, GSK has paid a yearly dividend of 80p a share. At the current share price of 1,378.6p, this translates into a chunky cash dividend yield of 5.8% a year, paid quarterly. That’s a decent incentive for buying and holding GSK while its share price recovers (it peaked at a closing high of 1,846p on 17 January, just 10 months ago). Finally, in historical terms, GSK’s stock is cheap on fundamentals, trading on a price-to-earnings ratio of 10.9 and an earnings yield of 9.2%. For me, this is far too cheap and, as an existing GSK shareholder, I’d happily buy more stock today!
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Cliffdarcy owns shares of GlaxoSmithKline. The Motley Fool UK has recommended GlaxoSmithKline. 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.
The post As US stocks roar to record highs, I’d rather buy these cheap shares here in the UK! appeared first on The Motley Fool UK.