Since last Monday (before the US election), the FTSE 100 index has staged a terrific comeback. As I write, the Footsie is up almost 670 points (12%) in a week. That’s an incredible return and, indeed, is one of the biggest bounces in the index’s 36-year history. This surge has been driven by two events: first, Joe Biden defeating Donald Trump in a closely contested US presidential election. Second, news today from Pfizer and BioNtech of a vaccine said to be 90% effective against Covid-19 sent shares soaring this lunchtime. Despite this double bounce, I’m certain that the FTSE 100 is still packed with cheap shares. Here are two I’d buy today.
Cheap shares: Lloyds leaps almost 15%
As I write, the share price of Lloyds Banking Group (LSE: LLOY) hovers around 31.4p, up over 4p (14.7%) since Friday’s close. That’s a huge one-day leap for a stock that’s been under relentless pressure throughout 2020. Despite today’s surge, Lloyds shares have still crashed by almost half, down 44.2% over the past 12 months. What’s more, at its 52-week high on 13 December 2019, Lloyds shares closed at 73.66p, roughly 2.35 times their current value. To me, this suggest that Lloyds is still deeply in the ‘cheap shares’ bargain bin.
Furthermore, even after today’s stock surge, Lloyds’ market value is a mere £19.7bn. To me, that’s a crazily low valuation for the UK’s biggest retail bank (with 30 million customers). Of course, being Britain’s biggest mortgage lender in the worst economic collapse for over 300 years will be painful. Also, Lloyds’ 2020 earnings should be mostly wiped out by loan losses and credit-impairment charges. In addition, and at the request of the bank regulator, Lloyds hasn’t paid a dividend in 2020. Yet I still believe that these cheap shares have much further to go.
After all, Lloyds actually made £1bn of pre-tax profit in the third quarter of this year. Likewise, it has a Common Equity Tier 1 (CET1) ratio of 15.2% (versus a minimum requirement of 11% for this measure of financial strength). In other words, it has a rock-solid balance sheet and conditions have improved markedly since the spring lows. Hence, I’d buy these cheap shares today, ideally inside an ISA, to enjoy future capital gains and the return of tax-free dividends!
BP surges 16%
BP (LSE: BP) is another FTSE 100 stock that has taken a brutal battering this year. As I write, shares in the oil & gas Goliath have gushed 31.5p (15.7%) today, hitting 231.3p as I write. Yet 2020 has been the toughest year for the energy giant since the tragic Deepwater Horizon disaster of 2020. At their 52-week high on 12 November 2019, BP shares closed at 513.5p, roughly 2.22 times their current level. Alas, thanks to the combination of the Covid-19 crisis and an ailing oil price, BP shares collapsed to a 25-year low of 188.5p on 28 October. Since then, they have leapt by almost a quarter (22.7%), but are still cheap shares to me.
Yes, BP is an ‘old economy’ business facing an existential crisis in the transition to a low-carbon future. Yes, the price of a barrel of Brent Crude has fallen this year from around $70 to $43. But BP has ‘Big Plans’ — including massive job cuts, asset sales and cost reductions — to return it to rude health. Meanwhile, these cheap shares offer a dividend yield of 6.9% a year (in cash, paid quarterly). That’s a huge incentive to buy and await a better future for BP. That’s why I would continue to buy it today — for me, BP still means Bargain Price!
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Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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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