With November into its final hours, what a month this has been for UK shares. As I write, the FTSE 100 index has soared 785 points since Halloween, leaping by 14.1% in one month. That’s the Footsie’s best monthly performance since its inception in 1984 (when I was just 16). Investors across the Atlantic have also had a bumper month, with the S&P 500, NASDAQ and Dow Jones Industrial Average indices all hitting record highs last week. Although American investors have had another good year, we Britons cannot say the same. The UK stock market has has a tough 2020, leaving too many cheap shares buried deep in the FTSE 100.
The FTSE 100 struggles in 2020
The S&P 500 is ahead by 12.6% in 2020, largely thanks to the stunning outperformance of mega-cap tech stocks. Meanwhile, the European Stoxx 600 index has slid by 5.5% this calendar year. The FTSE 100 — perhaps the world’s most unloved index — has dived by 15.7% since 2019. Obviously, the Covid-19 pandemic has battered UK equities. Likewise, the prospect of a no-deal Brexit in just over a month has scared off global investors from buying UK stocks. In addition, the FTSE 100 is packed with ‘old economy’ shares — financials, energy companies and miners — that a new generation of investors shun in favour of momentum stocks such as Tesla.
Value investing still works
I’m an old-school value investor: I aim to make market-beating returns by tracking down unloved, undervalued and unwanted cheap shares. I’m also a contrarian, which means that I prefer to go against the herd. I aim to sell when markets are euphoric and buy when markets are miserable. For example, during the spring market meltdown, my family moved our entire cash pile into shares towards the end of March. The amazing returns since then have been among the highest in my 34 years as an investor. Sometimes, as billionaire investment guru Warren Buffett says, it pays to “be greedy when others are fearful”.
When cheap shares get cheaper, I’d buy
Until this month, energy giant BP (LSE: BP) was among the FTSE 100’s ‘most hated’ cheap shares. BP has had a hideous year. At the start of 2020, it was riding high, with its share price peaking above 508p on 6 January. Then came Covid-19, triggering an oil-price collapse that sent the price of a barrel of Brent Crude crashing from $70 to below $16 on 22 April. With economies in lockdown and oil demand falling, BP shares capitulated. Just over a month ago, on 28 October, BP shares hit a 26-year low of 188.52p. The last time they were this low was in early 1994. Wow.
As I write, BP’s stock stands at 256p, almost 67.5p (35.8%) above its recent low. That’s a healthy return in just 32 days. Nevertheless, I believe there are more gains to come from these cheap shares. Today, BP’s market value is just £53.5bn, a mere fraction of its previous heights. Though BP cut its dividend in 2020, its shares still pay quarterly dividends adding up to a cash yield nearing 6.2% a year. Also, the oil price has bounced back to hover around $48. For these reasons, I think that BP could be a champion stock in 2021. That’s why I’d buy these cheap shares today, ideally inside an ISA, to enjoy years of tax-free cash dividends and future capital gains!
