There are plenty of investment opportunities in the FTSE 100 for bargain lovers like me today. Here are what I believe to be two of the best cheap stocks to buy on the index right now.
Defence darling
The huge amounts Western nations spend on defence makes BAE Systems (LSE: BA) a rock-solid FTSE 100 share in my book. Thanks to its broad range of cutting-edge hardware that can be found on land, at sea and in the air, it’s a critical supplier to US and UK armed forces.
Total military spending has been soaring of late. According to the Stockholm International Peace Research Institute, global arms spending hit its highest for more than 30 years in 2020. It looks likely that spending by the West will keep growing strongly amid a perceived elevated threat from superpowers like China and Russia and the ongoing fight against terrorism.
Analysts at Statista think US defence spending will rise every year this decade before hitting $915m in 2031. That compares with the $733m expected outlay it forecast for 2021. If this proves correct, major defence operators like BAE Systems will see demand for their technology soar in the coming years.
Today BAE Systems trades on an undemanding forward price-to-earnings (P/E) ratio of 12 times. This provides share investors with decent bang for their buck, in my opinion. On top of this the company carries an inflation-beating 4.5% dividend yield. I think the blue-chip is a top buy for me, despite the threat posed by the rise of responsible investing, a theme that is seeing defence stocks fall out of favour with investors. The JP Morgan American Investment Trust, for example, recently dumped its holdings in aerospace giant Raytheon Technologies for ESG reasons.
One of the best FTSE 100 stocks of the 2010s
I also think Persimmon looks too cheap for me to miss at current prices. This FTSE 100 share trades on a forward P/E multiple of just 10.5 times. But what’s really grabbed my attention is the housebuilder’s enormous 8.3% dividend yield.
Persimmon was the Footsie’s eighth best-performing stock of the 2010s. During that time its return on investment rose at a compound annual growth rate of 25.5%. The same conditions that helped propel Persimmon’s returns in the last 10 years remain very much in play today, I feel.
First-time buyers continue to receive considerable support from the government’s Help to Buy incentive scheme. Bank of England base rates are extremely low versus historical norms and are likely to remain so (Lloyds Bank, for example thinks the rate will remain below 1% between now and 2025). And homeowner affordability will remain boosted by the high level of competition in the mortgage market. In fact the rapid rise of challenger banks means that the landscape is more competitive today than it was previously.
I own shares in Barratt Developments and Taylor Wimpey to make money from this favourable trading environment. And I’m thinking of buying Persimmon too on account of that gigantic 8.3% yield. I’d buy the builder despite the threat that building materials shortages pose to profits. It’s a problem that could significantly drive up costs and potentially hit production rates.
Royston Wild owns shares of Barratt Developments and Taylor Wimpey. The Motley Fool UK has recommended 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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