I’m searching for the best cheap FTSE 100 stocks to buy for my portfolio in 2023. But here are two I think could prove to be value traps for UK share investors.
Tesco
Food retailers like Tesco (LSE: TSCO) are extremely high-risk as competition in the UK grocery space balloons.
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Much has been made of the rapid expansion programmes of German discounters Aldi and Lidl. Both plan to open hundreds of new stores over the next few years. Meanwhile Amazon — a company which sells essential products some 13% cheaper on average than other retailers including Tesco — is also still investing heavily in its UK grocery operation.
The pressure on Tesco to keep its prices low looks set to grow further as Asda embarks on fresh expansion. On Tuesday, Britain’s third-largest chain announced plans to build 300 new convenience stores by 2026.
I’m afraid Tesco’s market-leading online operation alone doesn’t make it a buy for me today. Its wafer-thin profit margins (which fell to 3.9% in the six months to August) are under attack from increased competition. And in 2023, they should remain crimped by rising energy, labour and product costs too.
Today, Tesco’s share price trades on a forward price-to-earnings (P/E) ratio of 11 times. The grocer also carries an attractive 4.6% dividend yield. But even at current prices I believe the risks of owning the FTSE 100 supermarket outweigh any potential benefits heading into the new year.
Shell
Oil producers like Shell (LSE: SHEL) have performed strongly in 2022. Their share prices have been boosted by strong oil and gas prices which have risen on the back of supply fears.
Recent news flow suggests that fossil fuel values could remain rock-solid for some time too. The influential group of OPEC+ oil-producing countries continues to keep the taps turned down, sapping market supply. This 23-nation-strong cartel produces about 40% of the world’s oil.
At the same time, the war in Ukraine persists, keeping worries over supply on the boil. And concerns over a growing supply and demand imbalance have risen following China’s decision to loosen Covid-19 restrictions.
But, equally, there’s a strong chance that oil prices could sink, pulling profits at Shell much lower. A string of forecast downgrades from economists and financial bodies for the global economy in recent weeks doesn’t bode well for crude demand in the next 12 months. Continued central bank monetary tightening could have a severe negative effect on oil consumption.
Shell’s share price could also fall as questions over long-term oil demand will no doubt grow. Renewable energy capacity looks set to keep growing strongly next year. The oil major might also sink in value as the theme of responsible investing continues grow and high-polluting companies become increasingly unpopular.
Today’s Shell’s shares trade on a forward P/E ratio of 5.2 times. They also carry a fatty 4% dividend yield. But, like Tesco, I think the FTSE company’s low valuation reflects the range of dangers it poses to investors as we look towards 2023 and beyond.
