I am always on the lookout for cheap British stocks. These stocks should have reasonable forward price-to-earnings (P/E) and price-to-sales (P/S) ratios. Ideally, the stocks should also have solid returns on equity. That takes care of the cheap part.
I also want my bargain UK stock picks to show some positive price momentum. I want analysts or the company to revise earnings estimates higher or for there to be recent earnings surprises. Hopefully, that means the price of my stock picks should rise in future.
I think GlaxoSmithKline (LSE:GSK) and BP (LSE:BP) fit the bill, and I would buy them both for my Stocks and Shares ISA.
Is GlaxoSmithKline a stock market bargain?
Glaxo is a FTSE 100 stock trading at 13.9 times consensus forward earnings, has a P/S ratio of 2.4, and returns around 29% on equity. Although the stock is down almost 5% in a year, it was up 11% last month.
Analysts are also raising 2021, and 2022 earnings estimates for Glaxo, and so is the company. Glaxo certainly fits my criteria for a bargain UK stock. So, what made the stock cheap? Without its name being attached to a Covid-19 vaccine, Glaxo suffered a lack of visibility during the pandemic. There is also the upcoming split of the company into a riskier biopharma and a safer consumer healthcare company. Then there was the warning of lower aggregate dividends being paid post-split.
Investors have had time to digest all of this, and now the stock price is rising. Glaxo is collaborating on four Covid-19 vaccine candidates. Splitting into a riskier biopharma company and a more stable consumer healthcare company, both with appropriate capital structures, makes sense to me.
Nonetheless, there is a risk that the split might be more expensive than planned. A prominent investor is questioning the leadership choice for the biopharma company, which could prove a distraction. But, I think the investor base will increase on aggregate after the split, which should be good for the Glaxo stock price.
BP looks like a cheap British stock
BP has a P/E ratio of 6.7 and a P/S ratio of 0.68, which makes it seem very cheap. The return on equity is good compared to the rest of the industry but is a relatively low 9.3%. BP stock has fallen 8% in price over the last month. But, the stock is up 24% for the year and 11% during the previous three months. Also, analysts are increasing their earnings estimates for BP upwards.
BP recorded a colossal loss of £20bn in 2020. But, earnings have rebounded as the price of oil has recovered. However, fossil fuels are increasingly out of favour with the investment community. BP seems to recognise this and the greater climate imperative and is pivoting towards a greener future.
The company plans to cut oil and gas production by 40% by 2030. It plans to invest $5bn per year in renewable energy projects and be ‘net zero’ by 2050. A cleaner BP should be priced higher by investors, so the outlook for the share price is, I think, positive. However, transitions are tricky. BP is relying on fossil fuel revenues to support its green transition. There is a chance these could dry up sooner than expected. Nevertheless, I think BP is a cheap UK stock that I would consider adding to my ISA.
James J. McCombie owns shares in GlaxoSmithKline. 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.
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