Value stocks are my favourite type. My portfolio is full of them. But I wondered whether I’d missed any obvious ones and called in ChatGPT for a second opinion.
The artificial intelligence chatbot instantly came up with three FTSE 100 stocks, but something was up. The first was Rolls-Royce, which looks more like an overpriced growth stock than an underpriced value play.
So I made myself clear. I told my robot assistant that a value stock refers to a company that appears to trade at a lower price relative to its fundamentals, with potential to recover.
ChatGPT is only a glorified computer programme, but it’s no fool. It quickly latched on.
I love Legal & General Group too!
Its first pick was insurer and asset manager Legal & General Group (LSE: LGEN). This one I can totally get behind. I hold the stock myself and love its bumper 8.4% yield.
The shares have struggled though, falling 5% over 12 months. Yet they’ve crept up 5% over the last month. That’s mostly down to growing interest rate cut hopes, which will hit yields on rival asset classes such as cash and bonds.
No dividend is guaranteed and cover is still thin at 1.1. Yet the board remains positive and is planning steady increases of around 2% a year. Legal & General isn’t as cheap as it was, trading at a price-to-earnings ratio (P/E) of 33 times earnings. The share price could be volatile in the short run, but there’s value waiting to be released over time. Plus those dividends.
I wish I’d bought NatWest shares too
ChatGPT’s second value pick turned me green with envy. That’s because it’s NatWest Group (LSE: NWG) whose shares jumped 92% over the last 12 months. Why so green? Because I bought rival Lloyds Banking Group instead, which has trailed.
NatWest was bailed out in the financial crisis. At its height, the government owned 84% of the then Royal Bank of Scotland Group. That’s now down to just 8.9% and ChatGPT says this “has further alleviated previous market concerns, potentially leading to further share price appreciation”.
NatWest still looks good value despite its blockbuster run, trading at just 8.8 times earnings. The dividend yield has dipped below 4% though.
Interest rate cuts may squeeze net interest margins and the potential UK recession might drive up loan defaults. I’d still buy if I didn’t hold Lloyds but I do. Oh well.
But I’m not too keen on Vodafone
Finally, ChatGPT picked a stock I swore I wouldn’t touch with a bargepole: telecoms giant Vodafone Group (LSE: VOD).
My AI chum says its trailing P/E of 11 suggests “it may be undervalued relative to its fundamentals”. It also praises Vodafone’s “substantial dividend”, ignoring that the 11% trailing yield will be slashed in half from March.
To be fair, ChatGPT does warn that intense competition in the telecoms sector may pressure profit margins, and that Vodafone requires “substantial capital expenditure for network maintenance and expansion, especially with the rollout of 5G technology”.
The Vodafone share price is flat over one year but down 54% over five. In fact, it’s consistently fallen throughout the millennium.
I do like value stocks. Vodafone looks more like a value trap for me though. Still, two out of three isn’t bad.
This post was originally published on Motley Fool
