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FTSE 100 shares: 3 cheap UK shares I’d buy now to capitalise on the stock market recovery

Peter Stephens
·3-min read
Business development to success and FTSE 100 250 350 growth concept.
Business development to success and FTSE 100 250 350 growth concept.

The performance of many FTSE 100 shares over the last year has been hugely disappointing. A number of UK shares are trading at price levels significantly down on a one-year basis, as a struggling world economy has weighed on their prospects.

While further falls can’t be ruled out in the short term, they could offer long-term turnaround potential. A sustained stock market recovery has always been recorded after bear markets in the past. Therefore, with the following stocks currently offering wide margins of safety, now could be the right time to buy them in a diverse portfolio of UK stocks.

A low valuation relative to other FTSE 100 shares

Lloyds Banking Group could offer a wide margin of safety compared to other FTSE 100 shares at the present time. The bank is experiencing very tough operating conditions caused by a weak economic performance and low interest rates. This could cause its financial performance to suffer in the first part of 2021. It also faces political uncertainty caused by Brexit.

However, this outlook may be priced in by investors. The bank’s shares have fallen by 45% in the past year. It now trades on a forward price-to-earnings (P/E) ratio of 10, which suggests there’s scope for a share price recovery. With the UK economy’s prospects likely to improve significantly between now and the end of the year, the outlook for Lloyds may change materially over the coming months and years.

A dividend opportunity relative to UK shares

GSK could also be an attractive investment versus other FTSE 100 shares. The company currently has a P/E ratio of under 12 as investors have seemingly cooled on its plans to split into two businesses.

This change could mean instability in the short run. However, it may also provide additional growth opportunities and efficiencies worth the cost of separation. With GSK currently having a dividend yield in excess of 5%, it also has a worthwhile passive income return. With interest rates likely to remain low for many months, if not years, it may become increasingly popular among a wider pool of investors.

A recovery opportunity following a tough period

Some FTSE 100 shares such as BT have been on a downward trend for many years. The telecoms giant now has a P/E ratio of 7.5 after its 30% stock price decline since January 2020.

Although the company’s financial prospects may be downbeat in the short run, its operational progress has been encouraging. For example, it’s becoming more efficient and is investing in areas such as 5G and faster broadband speeds.

This may provide the company with a competitive advantage that enables it to post rising profitability and a return to dividend payouts over the coming years. This may ignite investor interest in the stock and lead to a rise in its valuation.

The post FTSE 100 shares: 3 cheap UK shares I’d buy now to capitalise on the stock market recovery appeared first on The Motley Fool UK.

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Peter Stephens owns shares of GlaxoSmithKline and Lloyds Banking Group. The Motley Fool UK has recommended GlaxoSmithKline and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2021