As always, some stocks are cheaper than others, and there are a handful in the index trading at historic lows on a price-to-earnings basis.
Here we reveal two cheap FTSE 100 stocks that fund managers are still backing in large quantities, some of them among the highest profile in the industry.
Rolls Royce
The stalwart, income-paying stock issued its first profit warning in a decade earlier this year and results continued to be lacklustre today. Since the start of the year, Rolls Royce has shed 17.33 per cent off its share price, underperforming the FTSE 100 by more than 20 percentage points.
Year-to-date performance of stock vs index
Source: FE Analytics
However, Jeremy Thomas, co-manager of the Brunner Investment Trust, says in spite of the negative noise surrounding the company, there’s a compelling long-term opportunity to buy in at lower valuations.
“The long term opportunity for Rolls-Royce is clear with a £70bn order book, a market share in large civil aerospace engines in excess of 50 per cent, high margin aftermarket revenues and the potential to improve group margins meaningfully,” he said.
“As the chief executive John Rishton, acknowledges, today Rolls Royce is suffering some growing pains and this short term discomfort gives investors an opportunity to buy a long term winner at an attractive price, in our view.”
It’s currently trading on a P/E ratio of 16, nearly the cheapest the stock has been in more than five years, though the discount has come in slightly from last year. On a forward P/E, the stock is trading on just 11 times.
Rolls Royce’s long term performance speaks for itself. Over the last decade, the stock is up 460.49 per cent while the FTSE 100 has gained roughly a quarter of that, up 120.61 per cent.
Neil Woodford is backing Rolls Royce in the top-10 holdings in his CF Woodford Equity Income fund, as is FE Alpha Manager Mark Barnett in the Invesco Perpetual Income and Invesco Perpetual High Income funds, which he took over from Woodford earlier this year.
FE Alpha Manager Julie Dean’s Schroder UK Opps fund is another big holder, currently with a 3.04 per cent position.
In total, 30 funds in the IMA universe hold Rolls Royce in their top 10.
Royal Dutch Shell
Although the stock has performed well so far this year, Royal Dutch Shell is still miles off its historical highs, making its share price look cheap analysts’ view.
Shell is on a forward P/E of just 11 times, making it significantly cheaper than the wider index.
The Share Centre’s Helal Miah rates the stock a ‘buy’ after its second quarter earnings more than doubled compared to last year.
He also likes the stable cash flows and attractive 4.9 per cent dividend yield.
“We recommend the company as a medium risk ‘buy’ for investors as the group’s management have prioritised streamlining the operations through asset disposals, capital efficiency, along with delivering on expansion projects,” he said.
“We believe Royal Dutch Shell still represents a core holding for most portfolios due to the relatively stable cash flows and the attractive dividend income it generates.”
Year-to-date Royal Dutch Shell is up 11.53 per cent, ahead of the index.
Year-to-date performance of fund vs sector
Source: FE Analytics
However, this outperformance comes after several years of lacklustre performance. The stock trailed the index in both 2012 and 2013, shedding 7.01 per cent in 2012 while the index was up 9.97 per cent. Over the last three years, Royal Dutch Shell is still slightly behind the FTSE 100, returning 28.5 per cent compared to 30.09 per cent from the index.
The stock is a staple in equity portfolios, with 403 funds backing Royal Dutch Shell in their top 10. Richard Buxton holds the stock in his Old Mutual UK Alpha fund, as does FE Alpha Manager duo Adrian Frost and Adrian Gosden in Artemis Income.
It’s particularly popular with value managers. Star contrarian manager Alastair Mundy holds Royal Dutch Shell in his four-crown rated Investec Special Situations fund as does Tom Dobell in M&G Recovery.
