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These FTSE 100 The stock appears massively undervalued by the market. Here’s why I would buy them for my portfolio today.
A green energy game
Electric generator ESS (LSE:SSE) has dropped sharply in value since mid-summer. The FTSE 100 company has fallen as interest rates have risen steadily, raising the cost of its borrowing.
This could continue to be an issue in the future, given how high inflation remains in the UK. But despite this, I think the company’s shares are too cheap to ignore. Today, SSE stock trades on a forward price-to-earnings (P/E) ratio of just 9.9 times.
In fact, I think this low valuation makes the renewable energy specialist a brilliant bargain. First, the defensive nature of his operations makes him an ideal choice as the global economy falters. The cash flows and profits of energy creators and transmitters remain stable regardless of broader economic conditions.
I also like SSE stock because of the company’s focus on green energy. It’s on its way to triple renewable energy production by 2031 as it rapidly builds its offshore wind farms. This should prepare you well as the climate crisis increases demand for cleaner energy sources.
On the dividend front, SSE at first glance doesn’t look that impressive. Payments to shareholders will be reduced this financial year (until March 2024) as the company prioritizes investment in its assets. This means that the yield falls from previously high levels to a decent if unspectacular 3.9%.
But investors should consider two important things. Firstly, the dividend yield continues to exceed the FTSE 100 average (albeit by a hair). And secondly, dividends are expected to increase rapidly over the next two years, resulting in a final yield of 4.5% by financial year 2026.
Producing electricity from renewable sources can be problematic in periods of calm and cloudiness. But while this could temporarily hit SSE’s earnings, in the long term I expect earnings here to grow strongly.
powerful miner
mining giant Anglo-American (LSE:AAL) is another very cheap FTSE 100 stock on my radar today. It trades at an even lower forward price-to-earnings ratio of 9.4 times. And its dividend yield for 2023 stands at a fat 4.5%.
Unlike the ESS, companies like this are very sensitive to broader economic conditions. Demand for industrial metals is weak right now – and especially as key consumer China struggles – and may remain so in 2024 if interest rates continue to rise.
However, I think this uncertainty is built into Anglo American’s ultra-low share price. As a long-term investor, I’m considering buying the mining giant as well as a potential bet on the clean energy revolution.
This is because the metals it specializes in (including copper, nickel, manganese and iron ore) play a vital role in the transition to green technologies. I expect earnings to soar as markets move toward material deficits, a phenomenon that should push commodity prices much higher than current levels.
I also like Anglo American for its strong balance sheet. A net debt-to-adjusted EBITDA ratio of 0.9 times gives it room to boost earnings through project expansions and acquisitions.
