Until the final day of trading, it seemed likely that November would be the FTSE 100‘s record month. However, the Footsie dropped over 100 points (1.6%) on Monday, cutting its monthly gain to 690 points, a rise of an eighth (12.4%). Although this fell short of an all-time record, it was the index’s best monthly return in 31 years. The best month on record remains January 1989, when the FTSE 100 soared by a seventh (14.4%). What’s more, the FTSE 100 has had a good start to December. In perhaps the first hints of ‘Santa fever’, the index has climbed 110 points (1.8%, or £30bn) as I write. Despite these impressive gains, I see deep value in the Footsie’s cheap shares.
The FTSE 100 added £180bn in November
The FTSE 100’s November increase added an enormous £180bn to share values in one month — a record gain in absolute terms. It’s also the result of two pieces of good news. First, Joe Biden’s US election win gave an early lift to cheap shares. Second, updates on three promising Covid-19 vaccines delivered the relief rally the market so desperately needed.
November’s bumper returns are also an early Christmas present for investors fed up with 2020’s losses. It’s been a pretty awful year for the FTSE 100 index. The Footsie has lost 1,165 points — almost a sixth (15.4%) — this calendar year. Alas, even after November’s rebound, the index has still lost around £305bn of market value in 2020. That’s a bitter pill for investors to swallow.
I see these cheap shares booming in 2020
With the prospect of vaccines on the horizon, markets can look ahead to a strong economic rebound in 2021. If this happens, then corporate earnings should recover rapidly next year. In this scenario, cheap shares in cyclical sectors with exposure to booming trade should do well. Also, in any demand-led recovery, China is likely to lead the way.
That’s why I like the look of the cheap shares of global miner BHP Group (LSE: BHP), which is ideally placed to benefit from a 2021 rebound. An Anglo-Australian corporation, BHP is the world’s largest diversified mining group, extracting minerals, metals, and oil & gas. BHP employs over 80,000 people across the globe, mostly in Oz and the US. It has leading positions in iron ore, metallurgical coal and copper, plus oil, gas, and energy coal. It does a dirty, messy job, but one vital to fuel the world economy.
BHP’s global operations generate huge cash flows, which it uses to reduce net debt and pay hefty cash dividends. In fact, BHP’s yearly dividend is one of the FTSE 100’s top 10 by size. Also, the price of iron ore and copper have soared this year, with copper prices hitting a seven-year high (the highest since March 2013). Yet, at the current share price of 1,747p, this global Goliath has a market value of just £99.6bn. At a 6.7% discount to their 52-week high, I see BHP’s cheap shares as a potential winner in 2021.
At today’s price, BHP’s stock trades on a price-to-earnings ratio of 14.4 and an earnings yield of 6.9%. It offers an attractive dividend yield of 5.4% a year, which I should rise above 6% in time. That’s 1.75 times the 3.1% on offer from the wider FTSE 100. In short, I’d buy BHP shares today, ideally inside an ISA, for tax-free cash dividends and future capital gains!
