2 underperforming FTSE 100 shares with recovery potential

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2 underperforming FTSE 100 shares with recovery potential

While the FTSE 100 index’s (INDEXFTSE: UKX) 4% decline in 2022 is disappointing, a number of its members have delivered far worse share price performances.

For example, shares in housebuilder Berkeley Group (LON: BKG) have fallen by 18% year-to-date as interest rate rises have hurt investor sentiment towards the wider sector. Meanwhile, British Airways owner IAG (LON: IAG) is down 28% this year as operational challenges and a cost-of-living crisis have weighed on investor sentiment.

While the share prices of both companies could fall further in the short run, they offer long-term recovery potential. As such, they could prove to be bargain buys at the present time.

Berkeley Group

Rising interest rates that are set to reach 2.5% in the next year are expected to create more challenging operating conditions for housebuilders such as Berkeley. After all, rising mortgage costs are unlikely to be conducive to higher demand for new homes.

However, the company has the financial means to overcome a period of greater difficulty. Its net cash position stood at around £900m at the end of the 2022 financial year. This provides it with scope to invest in expanding its pipeline, as per its recent £413m acquisition of the remaining 50% stake in a joint venture with National Grid, at a time when prices may be more favourable.

Berkeley Group has a strong competitive position in the lucrative South East market. Its long-term pipeline of developments suggests it has the potential to deliver improving profitability. And, with there being an imbalance between demand and supply in the wider housing market that may not be levelled by rising interest rates, its long-term prospects appear to be relatively attractive.

Trading on a forward price-to-earnings ratio of around 10.5, Berkeley’s share price appears to offer a wide margin of safety that factors in the potential challenges facing the housing market. Alongside a generous capital return programme, this suggests it has recovery potential and long-term investment appeal.

IAG

IAG’s share price fall means that it now trades on an extremely low valuation. Indeed, its forward price-to-earnings ratio using next year’s forecast earnings is 6.5. It then falls to just 4.5 when the firm’s earnings forecast for the 2024 financial year is taken into account.

Clearly, the future prospects for the travel industry are highly uncertain at the moment. Covid-19 restrictions have eased, but it is still impossible to completely rule out their return. Meanwhile, ongoing operational issues that have prompted flight cancellations across the sector and a cost-of-living crisis that is set to worsen over the coming months could hold back investor sentiment towards the firm.

That said, its low valuation appears to include a wide margin of safety that adequately compensates investors for the relatively high risks faced by the business. Moreover, its latest trading update showed that it continues to have a large amount of cash on hand through which to survive tough operating conditions. Indeed, the company had total liquidity of €12.4 bn as at the end of March.

While accurately predicting the near-term outlook for IAG’s share price is impossible, the company’s solid market position, sound finances and a likely post-Covid recovery for the sector suggest it has long-term recovery potential.


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