I concentrate on two factors when I am looking for FTSE 100 shares to buy for my portfolio. These are valuation and growth potential.
Not many companies meet my strict criteria for having a low valuation and substantial growth potential. However, right now, there is one sector that I believe ticks both boxes.
FTSE 100 market leaders
The FTSE 100’s financial sector is, in my opinion, one of the most overlooked. Despite their improving fundamentals, investors seem to be avoiding these companies like the plague.
I can understand why some investors might not want to own financial stocks. These companies and their multi-billion pound balance sheets can be challenging to understand. The low-interest-rate environment also means banks are struggling to earn high returns on capital.
Nevertheless, I think the low valuations in the sector more than make up for these issues. That is why I would buy Barclays (LSE: BARC) and NatWest (LSE: NWG) for my portfolio today.
Before I get into why, I will start with their valuations. Shares in Barclays are currently trading at a price-to-book (P/B) value of 0.5 and a forward price-to-earnings (P/E) ratio of 8. Meanwhile, shares in NatWest are selling at a P/B value of 0.6 and a P/E of 8.8.
I think these companies would warrant these low multiples if they were losing money. They are not. City analysts expect Barclays to earn a net profit of £5.7bn this year. NatWest’s projected profits are £3.2bn.
So here are two highly profitable companies that are trading at incredibly low valuations. Both of the qualities I look for in potential investments are present. The stocks are cheap, and their profits are expected to expand.
I think investors are spending too much time concentrating on the risks of owning these stocks. Granted, both NatWest and Barclays do face some significant challenges.
Significant challenges
As I noted above, the current interest rate environment is a headache for these banks. They could also face challenges from additional regulation and further coronavirus economic restrictions, leading to loan losses.
I think the risk of further significant restrictions is relatively low. And even if they are introduced, the government has been quite accommodating in the past with additional financing. Past performance should never be used to guide future potential, but this suggests policymakers may be willing to provide additional capital in another lockdown.
The interest rate question may also be close to a resolution. Speculation is growing that the Bank of England will increase interest rates over the next six months. A hike would allow lenders to raise interest rates charged to borrowers and improve profitability. I think this catalyst could drive a re-rating of both stocks.
As such, despite the challenges these equities face, I would buy both Barclays and NatWest for my portfolio today.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. 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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