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I think these ultra-cheap FTSE 100 stocks could cost investors a fortune over the long term. Here’s why.
The bank
I’ve long had reservations about buying UK-focused banks like Barclays (LSE:BARC). And following their share price surges this year, I’m even more reluctant to invest.
Barclays is up an impressive 39% in the year to date. And yet the company still faces many of the significant problems it did at the start of the year.
Interest rates are tipped to reverse in the coming months, with the first step perhaps coming later in June. This would put added pressure on banks’ net interest margins (NIM), which are already receding following the end of Bank of England monetary tightening.
At Barclays, the NIM dropped to 3.09% during the first quarter from 3.18% a year earlier.
Margins are also under pressure as competition in the banking industry heats up. The scale of the battle was underlined by Monzo’s stunning full-year release of earlier this week. It showed revenues more than double in financial 2023-2024, to £880m, while customer numbers leapt 31% to 9.7m.
With some challengers including Monzo tipped to turbocharge fundraising with IPOs in the near future, attempts by traditional high street banks to grow (or even retain) customers will get tougher.
My final concern for Barclays is that Britain’s economy is in danger of a prolonged period of weak growth. It’s a danger to UK-focused cyclical shares across the London stock market.
Barclays shares are undeniably cheap on paper. A forward price-to-earnings (P/E) ratio of 6.7 times makes it one of the FTSE 100’s cheapest banks.
However, this reflects the significant problems it must overcome to grow profits in the short-term and beyond. On the plus side, impressive cost-cutting is helping to improve its bottom line (operating costs dropped 3% in Q1). But this represents nothing more than a sticking plaster, in my opinion.
The oilie
Fossil fuel giant BP (LSE:BP) is another FTSE 100 stock I’m keen to avoid this month. I think there’s a high danger of it delivering disappointing profits in the near term and beyond.
This is indicated by the company’s ultra-low P/E ratio of 7.2 times.
BP’s earnings are closely correlated to the value of the commodity it drills for. And Brent oil prices — which recently dropped to multi-month lows below $80 a barrel — are in danger of further falls on worrying supply and demand signals. Latest US inventory data showed an unexpected supply rise in the past seven days.
It’s quite possible that prices will recover later in 2024, providing a boost to BP’s bottom line. Fresh OPEC+ production curbs could come in to support energy values. A raft of interest rate cuts are also tipped that would help prices.
But oil majors like this still face an increasingly tough time as renewables steadily take over. And BP hasn’t helped its long-term outlook by scaling back plans to reduce fossil fuel investment and production.
Oil and gas production will now drop by 25% by 2030, down from a previous target of 40%. This leaves a big question over how it will generate future profits as the fight against climate change intensifies.
