A stock market dip is always a great time to go shopping for cheap shares, and the banking crisis has just thrown up a buying opportunity.
Although the FTSE 100 has picked up over the day or two it’s still trading more than 500 points below its all-time high. Some stocks now look incredibly cheap, including these two.
Now looks like a great entry point
Shares in UK’s largest housebuilder, Barratt Developments (LSE: BDEV), have plunged 21.34% over the last troubled 12 months and now trade at just 5.3 times earnings. That’s cheap, although there’s a reason, of course. Analysts are gloomy about the UK housing market’s prospects, with some expecting a crash of 10% or even 20% this year.
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That’s a worry, but also an exciting opportunity for a long-term buy-and-hold investor like me. If I waited until the property market was booming before buying Barratt shares, I’d almost certainly have to pay a lot more than today. Plus, I will have missed out on dividends in the interim, and Barratt offers a magnificent 8.35% yield.
Although the Bank of England is expected to hike base rates again tomorrow, we must surely be reaching the end of the cycle. If inflation and interest rates start falling towards the end of the year, homeowners will get some breathing space and house prices could recover. As will Barratt shares, if all goes well.
The risk is that the UK plunges into recession and house prices really do crash, hitting buyer confidence and Barratt’s forward order book. If inflation remains high at the same time, that will drive up input costs. Yet that’s a chance I’m willing to take given today’s tempting valuation point and my minimum 10-year timescale for holding the stock.
I’d balance that by investing in Legal & Insurance Group (LSE: LGEN), which is also cheap as chips trading at 6.2 times earnings.
It’s all about the dividend
The risk here is that L&G’s asset management operations will suffer if we get a full-blown stock market crash. That will hit client inflows and reduce the company’s revenues from percentage-based annual management fees.
The dangers are real but partly reflected in today’s low valuation. The L&G share price has fallen 12.8% over the last year but this has pushed up the dividend yield, which is now an incredible 8.15%.
While higher yields can prove unsustainable, I’m not too concerned about this one. The current payout is covered twice by earnings and the company has just posted a 12% increase in operating profits to £2.52bn.
Management is committed to its dividend, which has steadily increased from 16.42p per share in 2018 to 19.37p in 2022. Last year’s hike was a solid 5% and L&G’s balance sheet looks strong, with a record solvency ratio of 236%.
Given its recent underwhelming share price growth, management will be working hard to keep investors onside and maintaining a rising dividend is the best way to do that.
These are just two cheap FTSE 100 shares to have grabbed my attention in recent days. I’m now amassing the cash I need to buy them both, and maybe one or two more.
