These FTSE 100 stocks still seem way too cheap
The FTSE 100 may have risen above 7,000 points for the first time since May 2015, but there are still bargains on offer in the index. Rio Tinto(LSE: RIO) and Vodafone(LSE: VOD) both offer bright long-term prospects and yet trade on relatively low valuations. As such, they could be worth buying right now.
In Rio Tinto's case, the outlook for the iron ore industry is improving. Demand for steel from the biggest iron ore importer in the world, China, has risen in 2016. This bodes well for the medium-term outlook for the industry, since it tends to move in cycles. This could be the beginning of an upward cycle, although bearish investors may point to a forecast increase in supply of iron ore, which is set to take place over the next couple of years as new projects come on-stream.
However, what has happened in the past is that new low-cost projects replace existing high-cost projects, which leaves the iron ore industry in equilibrium. As such, the price outlook for iron ore may be more positive than the market currently anticipates.
Even if iron ore endures a challenging period, Rio Tinto offers a wide margin of safety. It trades on a forward price-to-earnings (P/E) ratio of 16.3. Given its sound financial standing, long-term growth prospects and increasing diversity, this seems to be a very appealing price to pay.
The outlook for Vodafone may appear to be highly uncertain. After all, it has focused its operations on Europe in recent years and with Brexit creating the potential for a challenging period, Vodafone's growth prospects could come under pressure.
However, this doesn't take into account Vodafone's strategy. It has focused on diversifying its product range to include pay-TV and broadband services. This means that it's better shielded against difficulties in one market, with other products able to pick up the slack to a certain extent. Furthermore, it has invested in an acquisition strategy, which has seen it access higher growth spaces within Europe. When combined with major infrastructure investment in recent years, this means that Vodafone's near and long-term futures are very bright.
Evidence of Vodafone's growth potential can be seen in its forecasts for the next couple of years. It's expected to increase its bottom line by 29% in the current year and by a further 13% next year. This puts it on a price-to-earnings growth (PEG) ratio of just 1.2, which indicates that it offers growth at a very reasonable price.
Additionally, Vodafone's yield of 5.4% continues to have huge appeal at a time when UK interest rates are heading downwards. Its yield provides more evidence that it's cheap, thereby making it a sound value play alongside Rio Tinto for the long term.
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Peter Stephens owns shares of Rio Tinto and Vodafone. The Motley Fool UK has recommended Rio Tinto. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.