The FTSE 100 has suffered less than other markets this year. For one, it was already depressed amid Brexit-related concerns. But also, the index is heavily populated with oil and mining stocks, which had been doing rather well until recently.
Right now, I’m looking for undervalued stocks on the index that will perform well when the market recovers. Yet when will it recover? That’s not certain, but I think there’s a bull run coming.
So, here are two FTSE 100 stocks I’m looking to buy, or buy more of, before the market recovers.
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Persimmon
Persimmon (LSE:PSN) is one of the UK’s biggest housebuilders. It’s also the highest-paying dividend stock on the index, although I don’t see that lasting. A 13.2% dividend yield is certainly unsustainable.
The housebuilder trades with a price-to-earnings ratio of seven, and that’s a little more expensive than its peers. There are probably two reasons for this. Firstly, the attractive dividend yield. But also, the fact that Persimmon has been less impacted by the cladding crisis than other housebuilders.
Persimmon anticipates spending £75m on recladding homes that were built using flammable material. That might sound like a lot, but it’s less than 10% of its pre-tax profits last year.
By comparison, some other developers will see the entirety of their 2022 profits wiped out by their ‘fire safety pledge’ — the name given by the government to the recladding scheme.
Despite recently reducing its volume guidance by 10% for the year, there are more positive signs. H1 profits were up, and it’s clear that demand remains high despite higher interest rates and that margins are strong. These factors were also cited by broker Liberum, which reiterated its ‘buy’ rating on the stock.
“What’s not to like about making the same level of profit using less units?,” Liberum said in a July update.
It’s also worth noting that while deliveries were delayed in the first half of the year, they will still be delivered eventually.
The cost of living crisis and further rises price may have an adverse impact on demand, but we’re not seeing it yet.
Rolls-Royce
Rolls-Royce (LSE:RR) is still a giant of the engineering world despite its collapsing share price during the pandemic.
It’s been three years of woe for the UK-based manufacturer. The pandemic saw its civil aviation business — the company’s largest sector — suffer considerably. The group took on more debt and went through a period of restructuring to bring capex down and reduced staffing numbers. It’s currently in the process of selling non-core business units in an effort to raise £2bn and bring down net debt, which stands at £5.2bn.
However, I think Rolls-Royce is undervalued given the recovery of the civil aviation industry and a backlog in its defence sector.
Civil aviation is definitely bouncing back, despite what we’re hearing on the news. Capacity is much closer to pre-pandemic levels than expected. IAG recently said its capacity for Q3 is 85% of pre-pandemic levels, while Q4 will be at 90%.
The defence sector is also booming. Rolls has noted a considerable backlog of defence-related orders. The firm may also benefit from the merging of the UK and Japan’s next gen fighter jet programmes. Previously the Americans had overwhelming controls over the Japanese market.
