The FTSE 100 is packed with exceptional bargain shares for investors to buy. This reflects the leading index’s ongoing underperformance compared to other global indices, not just in 2023 (when it rose just 3.8% in value), but during the last few years.
Many household names are now trading at rock-bottom valuations. Others carry large dividend yields that could boost an investor’s passive income.
Cheap shares
Fossil fuel giant Shell (LSE:SHEL) is one share that offers excellent value on paper. It trades on a forward price-to-earnings (P/E) ratio of just 7.7 times for 2024. And its corresponding dividend yield sits at a tasty 4.5%.
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Tesco (LSE:TSCO) also offers above-average dividend yields today. For the financial years to February 2024 and 2025 these sit at 3.9% and 4.3% respectively.
However, I believe these shares could end up costing me a fortune. Here’s why I’m avoiding them like the plague.
Competitive pressures
There’s no doubting Tesco’s incredible pulling power with the average UK consumer. Most of us have grown up browsing its bright aisles. And thanks to its Clubcard loyalty card scheme, the business continues to attract legions of new customers.
Yet the threat to its dominance is severe and steadily growing, as other grocers (particularly the German discounters Aldi and Lidl) expand their store estates and ratchet up the price wars.
Sales at Aldi rocketed 8% in the four weeks to Christmas Eve, taking total festive revenues above £1.5bn for the first time. Revenues at Lidl rose at an even faster pace in the period, up 12% year on year.
Both companies have pledged to continue boosting their value credentials too, in a troubling omen for established supermarkets. Aldi said this week it remains “committed to cut more prices during 2024″ to cement its place as the country’s cheapest grocer.
Problematically, Tesco has little choice but to reduce its own prices to stop its customer base from plummeting. This is a serious threat to earnings growth as retail margins stay under pressure. Indeed, adjusted operating margins remained low at 4.2% during its first financial half ending in August.
The company needs to shift eye-watering volumes of product to make these margins work. Unfortunately, this will become increasingly difficult as the discounters rapidly grow their store estates in the next few years.
Green threat
Energy giant Shell doesn’t face intense competition like Tesco. But its long-term future is uncertain as the world shifts from oil and gas to renewables and alternative fuel sources. So I’m aiming to avoid this blue-chip stock as well.
Alarmingly for fossil fuel companies, predictions of peak oil are being steadily brought forward as governments and consumers take steps to battle climate change. The International Energy Agency (IEA) for instance now expects oil usage to reach their all-time highs before 2030.
Unfortunately, Shell is retreating from the green energy space and re-prioritising its traditional operations. Last year it reversed plans to steadily reduce oil output. Other recent moves include selling stakes in some of its US wind and solar energy projects and cutting jobs at its low-carbon energy unit.
Shell’s formidable cash flows could allow it to continue paying large dividends in 2024. But the rising risks to long-term earnings make this a stock I’m still keen to avoid.
