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There is no sure way to find it London Stock Exchange Index (FTSE) stocks with guaranteed growth potential. For that, you would need a crystal ball. However, checking certain metrics can provide insight into whether a current price is a good value or not.
Three metrics I used to assess value are the price-to-earnings (P/E) ratio, the price-to-book (P/B) ratio, and discounted cash flow (DCF) analysis. P/E and P/B ratios assess whether a stock's price is appropriate compared to earnings and book value. A discounted cash flow (DCF) model considers whether the company has enough free cash flows to justify the current price.
Using those metrics, here are three options that I find attractive and might be worth further research into.
Chartered standard
My portfolio is already heavily weighted towards bank stocks, so I'm not really looking to add more. Still, I couldn't help but notice Chartered standard (LSE: STAN) has a low price-to-earnings ratio of 8.1, well below the UK market average of 16.8. Its price-to-book ratio of 0.5 is also attractive, below that of rival banks. HSBC Bankof 0.8, and the UK banking sector average of 0.7.
Future cash flow estimates suggest the current price could be 63% undervalued.
But the price has already risen this year and recently hit a 12-month high. Now at £7.13, it is down just 0.28% over the past five years. For it to continue to rise, a strong economic recovery may be needed, which may (or may not) be on the horizon.
With interest rate cuts expected this year, the banking sector could benefit, but as much of Standard's business is concentrated in Asia, I would carefully consider the outlook for this market before buying.
Group of consolidated international airlines
Group of consolidated international airlines (LSE: IAG) is the parent company of British Airways, Iberia, Vueling and Aer Lingus. It has lost 60% since the start of 2020 and has been struggling for years to recoup losses incurred during the pandemic. Now, with a persistent debt load of €16 billion compared to just €3.28 billion in equity, it has a debt-to-equity ratio of 490%.
This severely limits any future funding initiatives aimed at increasing profits.
But once all this is behind us and air travel has returned to full capacity, things should improve. The current price-to-earnings ratio is very low at 3.7, well below the UK market average and almost half the airline industry average of 6.6. And forward earnings estimates put fair value closer to £2.30, not the current price of £1.76.
With the summer holidays approaching, I wouldn't be surprised to see an increase in sales.
Imperial Marks
Imperial Marks (LSE:IMB) is working to distance itself from the stain that is its tobacco business. While it remains the main source of profits, it is aware that times are changing and is opting for less harmful next-generation products such as vapes. The long-term success of this plan remains to be seen.
For now, though, the price looks cheap, sitting 50% below its 2016 peak. With earnings up 25% in the past year, future cash flow estimates put it 62% below its fair value. And with a price-to-earnings ratio of just 8.3, it's below the UK market average and the tobacco industry average. Plus, it has a very attractive dividend yield of 7.2%, which is well covered by cash flows.
