When looking for shares to buy, I tend to focus on equities I believe look cheap compared to their growth potential. Usually, I look across the market for these opportunities. However, I believe there are a handful of FTSE 100 stocks that meet my criteria right now.
FTSE 100 blue-chip shares to buy
The first company on my list is the insurance giant Aviva (LSE: AV). Over the past five years, the organisation has been pushing ahead with a transformation plan that has seen it divest most of its international businesses. In total, eight divisions have been sold for £7.5bn. Cash received from the sales has been used to repay debt and reinvest back into the UK business.
Traditionally a retirement saving and life insurance provider, Aviva is now focusing on expanding its general insurance business.
General insurance includes so-called short-tail insurance policies, which last only a year or more, unlike life insurance policies which can last for decades.
By using this strategy, the group should be able to generate higher profits while freeing up capital. Regulators require insurers with long policies to hold more capital against these liabilities, as the longer the policy, the more that can go wrong. As shorter policies are more predictable, companies have more flexibility.
As well as divesting international businesses and refocusing the business model, management is also looking to cut £300m of costs. This should help improve profit margins and the amount of cash available for distribution to investors.
It should also provide capital for the company to use to market its asset management platform, another key area of growth for management.
Asset management and short-tail insurance exposure could help the group’s growth, but these are incredibly competitive markets. Aviva cannot take its growth for granted in these markets, considering the size and scale of some of its competitors. Fending off competition is probably the biggest challenge the company will face as we advance.
Still, Aviva is transforming into a more focused financial services group by channeling its efforts into profitable, predictable products.
These efforts are already yielding results for investors. Management thinks the company can return £4bn of cash to investors from asset sales and the dividend.
At present, the stock supports a dividend yield of 5.5%. What’s more, despite the company’s transformation progress, the shares are trading at a forward price-to-earnings (P/E) multiple of just 8.7.
Based on these metrics, and the company’s growth potential, I would buy the FTSE 100 stock for my portfolio today.
FTSE 100 growth opportunity
The e-commerce market in the UK is booming, but an often overlooked part of this market is the infrastructure required to deliver packages on demand.
When I say infrastructure, I mean the cardboard and paper packaging required for every delivery. Supplying these products is big business, but it is also a commodity business with low-profit margins.
Economies of scale are required for success, which is the advantage available to Smurfit Kappa (LSE: SKG). Over the past decade, this paper and packaging group has been able to capitalise on the expanding e-commerce market. By focusing on efficiency and scale, the organisation has increased its operating profit margin from 8.9% to around 10.4% over the past five years.
Further growth seems likely as analysts believe revenues could increase by around €2bn (£1.7bn), or 24%, over the next two years. It looks as if the firm is on track to hit this target. Revenues for the nine months to the end of September increased 15% year-on-year.
Smurfit’s main competitive advantage is the company’s scale. It is the only large pan-regional player in Latin America and has over 350 production sites in 36 countries.
Supply chain disruption
Unfortunately, like other sectors, Smurfit is encountering some supply chain disruption. However, the company is offsetting some of this disruption by increasing prices, which it seems customers are only too willing to take.
Another advantage the group has over competitors is the fact that its products are 100% renewable and produced sustainably. I think this will become an increasingly important point for customers as we advance. It is yet another reason why I believe this business deserves a place in my portfolio.
I would buy the stock as a way to invest in the booming e-commerce industry. With a forward P/E of 14.9 and a dividend yield of 2.7%, I think the stock appears cheap.
Some challenges the business may face going forward include competition. As noted above, the market is incredibly competitive. Rising costs may also cause challenges if Smurfit cannot pass more of these on to consumers. And if there is a significant shift away from thrown-away packing due to recycling concerns, the group may be ill-prepared to deal with this change.
The final company I would buy for my portfolio of FTSE 100 stocks with growth potential is B&M European Value Retail (LSE: BME).
Research shows that consumers tend to switch down to cheaper own-brand and value products in periods of high inflation. With the Bank of England expecting inflation to hit around 5% in the near term, it looks as if value retailers such as B&M may experience an increase in demand.
Of course, there is no guarantee this will happen. Economic theories are just that, theories. If wages also increase in line with inflation, consumers will have no need to shop around for cheaper products. The UK retail industry is also incredibly competitive, and retailers may decide to fight back with lower prices themselves.
Nevertheless, I would buy B&M because I have been impressed with this company’s growth over the past decade. It has more than doubled revenues since 2016 by focusing on consumers’ preference for value. And as the business has grown, so has its buying power, which allows management to achieve better deals for consumers.
Even though the stock looks relatively expensive, trading at a forward P/E of 16.6, I think the shares are worth buying, considering the company’s potential. They also offer a dividend yield of 3.4%, which looks attractive in the current interest rate environment.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended B&M European Value. 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.