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FTSE 100 to surge to 8,500! 2 cheap stocks to buy before the recovery

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The FTSE 100 and other indices rallied last week as the fight against inflation makes solid progress. And subsequently, the Economic Forecast Agency has revised its predictions to be far more positive. In fact, the UK flagship index is now expected to reach as high as 8,488 points by January 2023 –an 18% jump in less than two months!

Obviously, forecasts have an element of inaccuracy. And these revised figures are by no means guaranteed to happen. But suppose the stock market does end up following this trend. In that case, it suggests the time to snatch up undervalued businesses could be running out.

With that in mind, here are two cheap-looking stocks that might be a bargain for investors’ portfolios.

A top 5%-yielding FTSE 100 business

With inflation cooling, pressure on consumer discretionary spending is expected to lift. That’s terrific news for the e-commerce industry. And as order volumes start to rise again, DS Smith (LSE:SMDS) should have little trouble bolstering its cash flow.

As a quick reminder, DS Smith is a world-leading supplier of corrugated cardboard. That’s hardly the most exciting enterprise. But it does play a vital role in online order fulfilment. And with demand for its products back on the rise, the stock has already begun recovering from its 36% drop over the first 10 months of 2022.

In a recent trading update, management confirmed that adjusted operating income for its upcoming interim results is expected to land around £400m. By comparison, these profits stood at just £276m a year ago, perfectly demonstrating the FTSE 100 firm’s improving outlook.

Of course, there are some risks to consider. While the macroeconomic picture is improving, there remains a high level of uncertainty. The Bank of England has warned of a looming recession due to the rapid interest rate hikes. And depending on its severity, it could send online shopping volumes back in the wrong direction, along with DS Smith’s share price.

Nevertheless, at a P/E ratio of 15 and a dividend yield of 5%, today’s valuation looks cheap. And for patient income investors, it poses a potential buying opportunity, in my opinion.

Consumer staples aren’t going anywhere

While discretionary spending has a question mark over its head, the same can’t be said about consumer staples. After all, regardless of what the economy is doing, people still need food, drinks, and hygiene products. And that’s something Tesco (LSE:TSCO) seems to be capitalising on.

In its latest interim results, the leading UK supermarket chain reported a respectable 3.2% increase in like-for-like sales over the past year. But on a three-year basis, this growth came in 11.5% higher than pre-pandemic levels, indicating the group’s continued success in getting shoppers through its doors.

From a profitability basis, the cost-of-living crisis has taken its toll. With Tesco ramping up its discounts and price-matching schemes, as well as suffering cost inflation, retail operating income fell by 10%. Needless to say, that’s not good news.

However, the ‘sales up, profits down’ situation seems to be a recurring theme among supermarkets in and out of the FTSE 100. Fortunately, Tesco is retaining its market dominance. And with inflation starting to cool, operating margins may soon start recovering.

In other words, while there are risks, Tesco shares could be a bargain buy for long-term investors today.

The post FTSE 100 to surge to 8,500! 2 cheap stocks to buy before the recovery appeared first on The Motley Fool UK.

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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended DS Smith and Tesco. 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.