The 5 Cheapest FTSE 100 Shares Today

Published in Investing on 8 August 2012

Which of these ultra-cheap companies might Warren Buffett buy?

Recent stock-market gains have seen the average P/E of FTSE 100 (UKX) companies reach 15.4. The P/E is a useful way to gauge the approximate value of a company, and while 15.4 isn't boom territory, it certainly isn't cheap either.

I recently looked at the five shares with the lowest P/Es in the FTSE 100 to see what was on offer. Do they represent hidden value, or are they cheap for a reason?

1. Resolution: P/E 4.2

Resolution (LSE: RSL) is an investment vehicle whose current business is life insurance. It purchased Friends Provident in 2009 and followed this with the acquisition of AXA's UK Life business during 2010.

Resolution's plan is to merge and reform these businesses to the point where it can achieve a profitable exit, probably through a sale or flotation. If successful, this should generate considerable profits for Resolution's shareholders, but the company has recently extended its target exit date from 2012 to 2014.

In common with other big UK insurers, Resolution's share price has been in the doldrums for some time, and the firm didn't inspire confidence when it cancelled a planned £250 million return of capital to shareholders in July, saying the handout would be too risky in the current economic environment.

Resolution's 9.3% yield looks too good to be true, although the company has said it will maintain its current dividend policy. A progress update is due on 15th August, when Resolution publishes its interim results.

2. Kazakhmys: P/E 4.3

Next up is Kazakhmys (LSE: KAZ), Kazakhstan's largest copper producer. Kazahkmys is relatively unusual in that it is a fully-integrated producer -- it mines, refines and sells its own copper. It also produces gold, silver and zinc.

Kazakhmys' low P/E rating is partly a reflection of the current weakness in mining shares, which have all fallen this year thanks to fears of weakening demand in China and the associated hit to commodity prices.

Yet Kazakhmys is a fairly low-cost copper producer and is quite robustly profitable, even with lower copper prices. The miner is expected to deliver pre-tax profits of £747 million on revenues of £2.2 billion this year and is on course to increase its copper production by more than 65% over the next six years, increasing its annual output from 300,000 to 500,000 tonnes.

Miners are not known for their generous dividend policies but Kazakhmys isn't too bad in this respect, with a current yield of 2.4%.

3. Eurasian Natural Resources: P/E 4.4

Eurasian Natural Resources (LSE: ENRC) is another Kazakh natural-resources group that makes most of its money from mining -- mostly ferrochrome, iron ore and alumina.

Like a number of other Russian and Central Asian businesses that have joined the FTSE 100 in recent years, ENRC has a very small 'free float'. Five major Kazakh shareholders control 73% of the shares, including an 11% stake held by the Kazakh government and a 26% stake held by fellow FTSE 100 member Kazakhmys.

Corporate governance concerns have made ENRC relatively unattractive to UK investors, and although it has now appointed more independent directors as part of a corporate governance review, I am still not keen.

4. BP: P/E 5.2

We now come to the first of the traditional British blue-chip shares in our low P/E trawl. BP (LSE: BP) suffered a dramatic reversal of fortunes in 2010 when its Macondo well blew out in the Gulf of Mexico.

Since then, the oil giant has been repairing the damage -- a process that has not been helped by its profitable but troubled Russian joint venture, TNK-BP, from which it is currently trying to extricate itself.

Despite its troubles, BP remains one of the few companies in the world capable of taking on the large, complex projects necessary to develop major new supplies of oil and gas.

Over time, I expect BP to recover from its current problems and to close the current valuation discount to its UK peer, Royal Dutch Shell. BP currently offers an attractive 4.1% yield and while a falling oil price would hurt its profitability, the shares look good for a long-term investment.

5. Rio Tinto: P/E 6.1

Global mining giant Rio Tinto (LSE: RIO) is a completely different proposition to the somewhat controversial Kazakh miners I looked at above. Rio has a £44 billion market cap and boasts operations all over the world.

Rio makes most of its money from iron ore, but also produces significant amounts of copper, aluminium and coal. To illustrate the scale of its operations, profits from iron ore totalled $4.7 billion in the first half of this year.

Rio's lowly P/E rating is fairly typical of the mining industry, which is currently adjusting to China's slowing growth. Rio looks excellent value to me and is a share I plan to buy next time I top up my ISA.

What would Buffett buy?

Billionaire investor Warren Buffett is known for his ability to seek out hidden value, invest against the trend and make massive profits. Of the five companies above, I believe that both BP and Rio Tinto might hold some attractions for him, if he was to make one of his rare non-US investments.

However, Buffett doesn't often invest outside his home turf, but he did recently invest $1 billion in a major UK blue-chip share -- a big brand we all know, and that's currently out of favour with the markets.

Buffett was so keen on this share that he now owns more than 5% of the company -- and if you would like to find out the identity of the company and the price Buffett paid, then I would strongly recommend you download this free Motley Fool report, "One UK Share That Warren Buffett Loves".

Hurry though -- like all Fool reports, availability is strictly limited, so please download it today.

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Further investment opportunities:

> Roland owns shares in Royal Dutch Shell.

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

PETERTDAWSON 08 Aug 2012 , 1:42pm

Certainly beats returns from your Building Society as long as your capital base is steady!

QuantumDealer 08 Aug 2012 , 3:41pm

...or 'none of the above'! He would be buying Standard Chartered shares, I reckon, given his preference for strong balance sheet / management banking franchises such as Wells Fargo which pay a growing dividend.

giveaholic 08 Aug 2012 , 7:11pm

Has Buffett bought another UK share or is TMF still flogging a report about Tesco?

goodlifer 09 Aug 2012 , 11:56am

The poor man/s Neil Woodford?

goodlifer 09 Aug 2012 , 4:17pm

Or perhaps "America's answer to Neil Woodford?"

Pls1nve5t 09 Aug 2012 , 8:53pm
Pls1nve5t 09 Aug 2012 , 8:53pm
JohnnyCyclops 10 Aug 2012 , 7:43pm

Puzzled more and more why every second article has to have a Buffett or Woodford angle/connection.

Also, this shows up on the home page as "five cleapest FTSE shares today', yet was posted two days ago. Surely some mistake?

Inagi 11 Aug 2012 , 2:24pm

regarding BP, is Roland saying that he expects BP's share price to climb to RDS's? The difference at the time of writing is about 2,000 pence!

Surely I'm misunderstanding this.

goodlifer 11 Aug 2012 , 5:28pm

Inagi,

I think perhaps he means BP might climb to the same multiple of earnings as RDSB.
That would make them around 520p.

Let's hope he's right!

simonfly747 13 Aug 2012 , 6:49pm

I have to admit to holding shares in Resolution. I would also have to admit to buying at the wrong time, but even then the yield looked terrific.

As the article says, the Life Insurers have been in the doldrums for some time, so that would equate to the right time to buy, would it not?

Why would anyone choose to hold too much in cash or bonds, when with some willingness to accept some 'risk', you can earn 9%?

For those individuals unwilling to make their own investment choices and act upon them, the likes of Mr Buffett and Mr Woodford, provide a reasonable avenue for their investment, assuming that these same individuals are willing to pay their fees.

For those with the intellectual capability to make sensible investment decisions AND act upon them, with the current dividend yields available from so many of the FTSE 100 Blue chips, investment is not currently 'rocket science'.

I do however wonder about the 'intellectual capabilities of our Pension Fund Managers, who seem willing to continue buy gilts, in the hope that such a (poor) investment decision will serve their pensioners present and future well!!



goodlifer 13 Aug 2012 , 7:18pm

simonfly747
"Why would anyone choose to hold too much in cash or bonds, when with some willingness to accept some 'risk', you can earn 9%?"

I too have often wondered.

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