The stock market rally we’ve seen since March 2020 has lifted the market by 30%. But the FTSE 100 is still down by nearly 15% compared to 12 months ago. I reckon that many FTSE 100 shares are still historically cheap on a long-term view.
Corporate profits suffered badly last year, and the speed of any recovery still isn’t clear. But I’m confident the world will gradually return to normal. By buying now, I hope to lock in some attractive gains over the coming years.
These FTSE 100 shares look cheap to me
Where’s the best value in the big-cap index?
One stock I’ve topped up on is tobacco firm Imperial Brands. Newish CEO Stefan Bomhard has brought a stronger focus to the business. I believe Imperial’s 9% dividend yield is safe. Rival British American Tobacco also looks good value to me, with an 8% yield.
Many big financial stocks also look cheap to me. The big banks would be the obvious choice, but I have concerns about their profitability in a world of record low interest rates. I’ve been investing in insurance stocks instead.
Aviva and Direct Line Insurance both look cheap and are expected to provide 6%+ dividend yields this year. If I didn’t already own Aviva, I’d probably be buying rival Legal & General Group for its 7% dividend yield and solid track record.
What else do I like?
I’d be happy to buy supermarkets Tesco and Morrisons at current levels too. Both seem likely to emerge from the pandemic in decent shape, with a stable outlook and a reasonable valuation.
However, I’d probably prefer to gain exposure to consumer shopping habits through Unilever. As I explained recently, I think this FTSE 100 share offers great long-term value under £40.
For exposure to renewable energy, I’d probably choose utility SSE. However, chemicals group Johnson Matthey also interests me — this 203-year-old business is investing heavily in battery technology.
Finally, I remain a buyer of big oil stocks. Although they face a challenging future, I expect a solid recovery in energy demand over the next 12 months. I think we’ll see profits recover strongly, supporting the evolution of these businesses.
What could go wrong?
The stock market is forward-looking. This means that when I buy a cheap FTSE 100 share, I know that it might be cheap for a good reason. For example, large insurers like Aviva and Direct Line have not delivered much growth in recent years. Aviva also cut its dividend last year.
Tobacco stocks are expected to face a continued fall in smoking rates over the coming years. I expect profits growth to be limited. That may justify the low valuations of these FTSE 100 shares.
Unilever has historically enjoyed above-average profit margins, thanks to the strength of popular brands like Dove and Magnum. But what if supermarkets’ cheaper own brands continue to take market share from Unilever, forcing prices down?
Over and above all of this, I think there’s a risk that it could take much longer than anyone expects for the economy to recover from the impact of Covid-19. That would probably be reflected in lower corporate profits.
The future is uncertain and there’s no guarantee of positive returns. But I’m convinced that FTSE 100 shares offer good value and am continuing to invest — selectively.
