The cheapest stocks in the FTSE 100 as the index hits another record high

Amid growing interest in UK stocks, particularly the FTSE 100 after it hit another record high, investors will be hunting high and low for opportunities.

Value-style investors like to sift through the rubbish bin to spot companies with the potential to bounce back. Quite often a stock looks cheap because the company faces near-term headwinds or competitive threats. Overcoming these issues can result in a share price recovery, and that’s why investors love to hunt for cheap stocks.

Cheap ratings can also attract takeover interest. There have already been 47 takeover situations involving UK-listed stocks this year, according to analysis by AJ Bell. Bidders have offered 40% above the market price on average, going to show that people think UK stocks are worth more than their market value.

Here are the cheapest stocks on the UK market according to two of the most popular ways to value equities.

1. Comparing a company’s share price to its earnings

One of the quickest ways to gauge if a stock looks cheap or expensive is to compare its share price to forecast earnings. A basic rule of thumb for UK stocks is a figure below 12 is cheap, 12 to 16 is fair value, and 17 or above is pricey. This is only a crude framework and it can vary from sector to sector.

You need to assess each company on its own merits. For example, a high price to earnings (or ‘PE’) ratio can mean a company is the equivalent of a glass of Stella Artois: ‘reassuringly expensive’, thanks to possessing certain quality characteristics. But high ratings can also appear with companies that are grossly overvalued. Likewise, a company can have a low rating because it is riddled with problems or because it is misunderstood. An investors’ job is to work out which one is correct.

Source: AJ Bell, ShareScope. Based on next 12 months' earnings forecast. Excludes investment trusts

WPP

Advertising agency WPP is the cheapest stock in the FTSE 100 index, trading on a mere 6.3 times forward earnings.

It is facing a structural shift in the advertising market where AI replaces tasks a traditional agency would do. News flow has been bad and the shares are down 41% in the past 12 months.

International Consolidated Airlines

Shares in British Airways’ owner International Consolidated Airlines (or ‘IAG’) have risen by 126% in the past 12 months, yet it still ranks as the second cheapest FTSE 100 stock.

Airlines often trade on a low price to earnings multiple because earnings can be volatile. One of the biggest costs is fuel and it’s hard to accurately predict oil prices. Planes are expensive and profit can evaporate if cabins are half-full.

Despite this situation, IAG as a business has come on leaps and bounds in the past few years. It is in a much stronger place financially than in the depths of the pandemic when it was drowning in debt. Having nursed its balance sheet back to good health, the airline operator has got itself in a comfortable enough position to reward shareholders while continuing to invest in expanding its fleet of aircraft.

It has enjoyed growth in revenue, operating profit, free cash flow and margins – key things an investor typically demands from a company. This good news alongside dividends and share buybacks has helped to drive up the share price.

JD Sports

Once deemed the king of trainers, JD Sports has lost its crown and now sits as the cheapest retail stock in the FTSE 100. The company’s unravelling was out of its hands. JD has been victim to shifting consumer behaviour and it has been in the firing line for Donald Trump’s new tariff regime.

People simply don’t have the money to keep buying the latest trainers or tracksuits. Furthermore, its expansion into the US was ill-timed, coming just ahead of Trump’s return to the White House.

Numerous sporting goods are made in Asia and they’re being slapped with tariffs upon arrival in the US. Investors have marked down shares across the sector on both sides of the Atlantic, and JD is having a tough time winning back the market’s favour.

2. Comparing a company’s share price to the value of its assets

The price to book metric enables individuals to screen for companies trading on a discount to the value of their assets. It has historically been the preferred way in which to value banks, insurers, property companies, housebuilders and investment trusts.

At the simplest level, a company is worth the value of its assets minus its liabilities – its book value.

Book value is the amount of money that would be available to shareholders if the company’s assets were sold at their balance sheet value and all liabilities were paid off. For example, if assets equal £100 million while liabilities are £60 million, then the company’s book value is £40 million.

This valuation method is often a first point of call when looking for takeover targets. If the market value of a company is lower than its book value, in theory, a buyer could take control and sell the company’s assets for more than it paid. This was a key theme during the heyday of the asset-strippers in 1970s and 1980s.

Investors and analysts use this comparison to differentiate between the true value of a publicly traded company and investor speculation.

As a rule of thumb, investors will infer a price to book of less than one to indicate that a stock is undervalued, while a ratio of greater than one may indicate that a stock is overvalued.

Source: AJ Bell, ShareScope. Based on most asset value in most recent set of full-year results

Vodafone

Go back 10 years and you’ll find that Vodafone traded in line with book value. It’s only been the past three years where the valuation has crashed to bargain basement levels.

The shares took a knock as investors fretted about growth prospects, weak cash flow and debt. This led to asset sales as Vodafone decided to focus on fewer territories, reduce debt and have a less complicated business structure.

Vodafone’s valuation is now improving. In April, Vodafone traded on a mere 0.3 times price to book – now it’s at 0.5-times as news flow is improving from the business, albeit it still has many challenges to overcome.

A lot is riding on the UK merger between Vodafone and Three as the parent group is struggling in Germany due to shifting market dynamics and needs its domestic operations to pick up the slack.

Barratt Redrow

In boom times, it’s normal to see housebuilders trade on two times net asset value. Today, they trade at or below one-times. That’s because investors are worried that interest rates will stay higher for longer and people will continue to struggle to get on the housing ladder due to mortgage affordability issues.

Barratt Redrow is the cheapest of the big housebuilder names, trading on just 0.7 price to book value. Latest news flow dragged the shares to a three-year low as the company reported lower than expected sales.

A contrarian might find this situation interesting. We have a government with pro-housing policies, and analysts forecast the Bank of England will keep cutting rates, albeit not quickly.