3 quality cheap stocks to buy now

These three companies have underperformed the FTSE 100 by up to 39% this year. G A Chester reckons they’re quality businesses and cheap stocks to buy now.

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I’m seeing a number of quality cheap stocks I’d like to buy now. This is despite the FTSE 100 being up 10.2% for the year to date and 17.7% on a 12-month view.

Economically sensitive stocks, like Lloyds, have thrived on generally rising optimism in 2021. By contrast, some of the index’s quality ‘defensive’ stocks have underperformed. I think this makes it a good time for me to invest in them.

My 3 quality cheap stocks to buy now

British American Tobacco (LSE: BATS), silver and gold miner Fresnillo (LSE: FRES) and household goods group Reckitt (LSE: RKT) are strong businesses, in my view. But demand for their shares has been weak for a while. The table below shows their performances relative to the FTSE 100 for the year to date and over the last 12 months.

 

Year to date (%)

12 months (%)

BATS

-7.8

-22.8

FRES

-39.3

-31.2

RKT

-11.9

-32.7

As you can see, BATS, FRES and RKT have seriously underperformed the Footsie over both periods. However, I reckon going against the crowd and buying these quality cheap stocks today could serve me well in the long term.

Friendless Fresnillo

Fresnillo is the world’s largest primary silver producer and Mexico’s second-largest gold producer. It has a long history of mining, and a proven track record of mine development and reserve replacement.

It’s been the worst performer of the FTSE 100 so far in 2021. This has left the shares trading at 14.1 times forecast earnings with a prospective dividend yield of 3.3%. I think this represents good value. However, like most London-listed miners, Fresnillo operates in a country with above-average political risk.

To mitigate risk, I’d feel inclined to split my investment, and buy fellow gold and silver miner Polymetal International alongside Fresnillo. Polymetal, whose mines are in Russia and Kazakhstan, has also underperformed the Footsie this year.

Rejected Reckitt

Geographical diversification isn’t an issue with out-of-favour Reckitt. It’s a multinational business, selling category-leading health, hygiene and nutrition products in 200 countries. Its world No. 1 brands include Durex, Calgon and Nutramigen.

After the recent weakness in its shares, Reckitt’s priced at 21.2 times forecast earnings with a prospective dividend yield of 2.7%. This is a richer rating than Fresnillo’s, but fast-moving consumer goods (FMCG) companies, like Reckitt, typically trade on earnings multiples in the 20s — and in the mid-to-high 20s when market sentiment is more favourable than today.

In the modern digital world of social media influencers and so on, barriers to building new brands are lower than they once were. Nevertheless, I feel Reckitt has the strength to handle competition and is a quality cheap stock for me to buy now.

Blackballed BATS

British American Tobacco is the world’s most international tobacco group, operating in more countries than any other. I mentioned that FMCG companies are typically highly rated by the market. Tobacco companies are currently exceptions to the rule. Unloved BATS trades at just 8.5 times forecast earnings with a gigantic prospective yield of 7.8%.

I think many market participants see rising health awareness and regulatory risk as fatal to the investment case. However, obituaries for tobacco companies have been written for many years. Reports of their death have so far proved to be greatly exaggerated.

I think the risks and challenges facing BATS are more than offset by the bargain-basement earnings multiple and terrific yield. As such, I’m looking at it as another quality cheap stock to buy now.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco and Fresnillo. 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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