These 2 FTSE 100 stars are up 60% in a year but still look massive bargains

IAG British Airways plane

A soaraway growth stock available at a low valuation is a rare thing. Normally, if a stock thrashes the market, it quickly starts trading at 20 or 25 times earnings. Yet these two FTSE 100 flyers are pretty much the cheapest on the entire index, as measured by their P/E ratios. Are they as good as they look?

Berkeley buzz

Berkeley Group Holdings(LSE: BKG) is up 57% over the past year and 160% over five years, but trades at just 8.35 times earnings. Berkeley's low valuation continues to reflect fears that Brexit will sink the housing market, despite its robust performance since the EU referendum.

Anxiety topped out last month as directors at Redrow and Cairn Homes offloaded stock, as did Berkeley founder and chairman Tony Pidgley, who sold around 750,000 shares for £26.8m. Have they spotted something we have missed? I cannot feel too negative about the housing market, with prices rising a steady 5% in the last 12 months, according to Land Registry figures published this week. The UK is still desperately short of properties.

Yes, mortgage costs may rise next month but given the UK's economic plight, the pace of any further interest rate hikes will be undemanding. In any case, an uplift of 0.25% adds just £18 a month to a £150,000 mortgage, survivable for most people. 

Property problem

Last month Berkeley said trading conditions were in line with management expectations, despite Brexit, stamp duty uncertainty and slippage in London. The group is on track to deliver pre-tax profits of at least £3bn over the next five years. Sale prices have exceeded hopes and cash balances are up, underpinning earnings visibility and financial strength. The stock offers a forecast yield of 4.9%, handsomely covered 2.5 times, with share buybacks in prospect as well.

The danger as ever is that property could crash as the global interest rate cycle moves, hitting the UK as well. That may explain why City analysts are forecasting a 19% drop in earnings per share (EPS) in 2019. Yet at today's price Berkeley still looks tempting to me.

Stratospheric growth

British Airways owner International Consolidated Airlines Group(LSE: IAG) is an even higher flyer, up 66% over 12 months and 300% over five years. That is a mighty performance, especially given the troubles afflicting other airlines, such as Monarch and Ryanair. Despite this vertiginous growth, it currently trades at just 7.61 times earnings. 

The group may even be a beneficiary of trouble elsewhere in the industry, as it is said to be eyeing up empty slots at Gatwick Airport following Monarch's collapse. European airlines Alitalia and Air Berlin have also both recently gone into administration.

Clear winner

International Consolidated Airlines Group posted solid 3.1% passenger traffic growth in September, with a strong Iberia making up for weakness at British Airways. The company's structural overhaul is bearing fruit and the stock now offers a forecast yield of 4.3%, covered 3.6 times, on top of that impressive share price growth.

Three years of double-digit EPS growth (95%, 79%, 27%) are forecast to slow to just 2% in 2017, then recover slightly to 9% in 2018. So future growth may be less impressive. However, it has flown impressively through recent sector turbulence and at today's rock bottom valuation still looks a buy to me.

These two stocks have made some investors brilliantly rich, because that's what stocks can do.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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