2 cheap FTSE 100 shares I’m avoiding like the plague!

Recent volatility in financial markets means many UK blue-chip stocks are trading lower. At FTSE 100 It is packed full of Enggo with brilliant bargains that fall in March.

As an investor it can be difficult to separate excellent cheap stocks from value traps. Some stocks are trading at low prices due to their high risk profile.

With this in mind, there are two FTSE index stocks that I am avoiding at the moment.

Lloyds Banking Group

Forward P/E ratio: 6.4x only

Dividend yield: 5.6%

I have long taken a dim view of UK-focused banks such as Lloyds Banking Group (LSE: LLOY). The domestic economy is predicted to grow slowly due to significant structural problems. These include issues like low productivity and post-Brexit trade friction.

It seems the market shares my pessimism too. This is why the Lloyds share price (like the share price Barclays and NatWest) trades at a lower price-to-earnings (P/E) ratio than emerging market-led operators HSBC and Standard Chartered.

I think UK banks may struggle to grow profits and dividends in the long term. And the problem will only get worse as interest rates return to 2010s levels.

The International Monetary Fund says the Bank of England’s current rate hike will prove “in the meantime“. This assumes the cost of borrowing will return to pre-pandemic levels once inflationary pressures ease.

The lower the interest rate, the smaller the margin between the interest banks charge borrowers and offer to savers. This could be a significant drag on the bank’s profits and explain why Lloyds’ share price remained weak after the 2008/09 financial crisis.

I like the steps the bank is taking to boost profits through constant cost cutting. I also think that a huge exposure to the housing market will pay off handsomely over the long term as home demand grows. The company has long been Britain’s largest mortgage provider.

But on balance I believe buying Lloyds shares is too risky.

Tesco

Forward P/E ratio: 12.5 times

Dividend yield: 4%

Historically, Tesco (LSE:TSCO) has been seen as a rock-solid share for UK investors. Food retail is one of the most stable sectors. And this particular operator sits on top of a tree.

This is part of the long-running Clubcard loyalty scheme. This ensures a steady flow of customers through our doors and website. And it can remain a big money spinner for the business.

But I wouldn’t buy Tesco shares because of the increasing competitive pressure. Amazon they are eating into online business, while the expansion of stores in Aldi and Lidl is sapping the store’s profits.

Of course, the company’s traditional competitors are also ramping up their attacks to steal customers. Today Sainsbury’sfor example, announced plans to offer lower prices on many products for members of the loyalty plan Nectar itself.

If this proves to be as popular as they are ‘Prices Clubcard‘ program, Tesco may have another big problem on its hands. It has the potential to pile even more pressure on its competitors’ wafer-thin profit margins.

The company trades comfortably below the average P/E ratio of 14 times for FTSE 100 stocks. But despite this low price I‘m not tempted to buy Tesco Shares.