When it comes to buying shares on the FTSE 100 index, I want to find top companies that have strong growth potential with an attractive price-to-earnings ratio. Businesses that can demonstrate growth in profit margins, increase in sales, and strong management, in industries that look promising for the future, I think, are worth putting my money into. Here are my top three UK shares on the FTSE 100 that I’m looking to invest in.
The aerospace group has been the centre of attention since its share price collapse back when the pandemic initially broke out. Nowadays, the situation looks a lot better for Rolls-Royce (LSE:RR) with its recent announcement of a £307m operating profit. This is a huge increase from its £1.63bn loss last year. This improvement has been the result of good management decisions, as RR recently acted to cut costs in its civil aviation programme.
The RR share price still looks cheap with a current P/E ratio of 2.87. This price could be a bargain if financial improvements continue.
However, the effects of another possible lockdown could be devastating for RR. The longer planes remain on the ground and any lengthening in production delay could see Rolls-Royce’s recovery efforts thwarted.
My second FTSE 100 index share is Anglo American (LSE: AAL). If I had to pick one share to beat inflation, I’m sticking with the multinational mining company. Raw material prices tend to increase during inflation, therefore companies that are commodity based can provide security for me. With a P/E ratio of 7.9 and an impressive financial performance in its most recent interim report, I think Anglo American looks undervalued.
It’s important to note that Anglo American could suffer from the drop in the price of platinum as well as the rise of Covid-19 cases in China. China is one of the largest markets for raw material consumption.
Lloyds (LSE: LLOY) is another share that has become a red-hot topic since the pandemic outbreak. The share price has increased by 62% over the last 12 months and has a P/E ratio of 6.66.
In Lloyds’ most recent trading update, the UK bank reported underlying profits of £4bn – an amazing recovery from its £281m loss last year. Further, I expect Lloyds to continue this improvement as the UK housing market strengthens.
However, I’m sceptical of Lloyds’ plans to launch its property investment brand, Citra Living. The UK bank plans to create 50,000 homes by 2030 in partnership with Barratt Developments. If the housing market continues to hold steadfast then perhaps it will be a profitable venture. However, I think this is a bit risky for the current market. I would’ve preferred to see Lloyds play it safe and focus solely on its recovery.
My outlook on these three shares
What attracts me to these FTSE 100 index shares is that they are all high-performing from a financial standpoint and they are all estimated to be undervalued with a P/E ratio of under eight.
There are risks of future delays in production and housing market slumps due to the possibility of the pandemic re-emerging to its former highs. However, I think these three stocks are overall excellent recovery plays.
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John Town has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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.