In October, the FTSE 100 was so full of cheap shares that I embarked on a buying spree, and I’m glad I did.
I got my timing just right, for once. I bought housebuilder Persimmon on 13 October, the day the current FTSE 100 rally started. The index stood at 6,707 then but on Friday it closed at 7,845, a thumping rise of 17%, adding £321bn to its value.
My stock picks have done marginally better. Persimmon is up 21.38%, while two purchases I made in the first week of November, Rio Tinto and Rolls-Royce, have leapt 19.81% and 31.01% respectively.
I love buying cheap shares
I targeted all three because they looked dirt cheap, with P/E ratios in low single digits. The recent FTSE 100 jump is a two-edged sword, though. While boosting the value of my existing holdings, it also makes my next purchases more expensive. I’d like to buy more cheap FTSE 100 shares, but have the bargains now gone?
Happily, a quick search shows there are still plenty of potential bargains out there. Among stocks I have been thinking of adding to my portfolio, I can see that Barclays still trades at just 4.7 times earnings. That’s despite the fact that its shares have rocketed by a third since 13 October, while my very own Persimmon is still cheap at 5.6 times.
Other cheap stocks on my wish list that are trading on single digit P/Es include Anglo American (6.1 times earnings), Taylor Wimpey and BT Group (both 6.3 times), Lloyds Banking Group (6.5), Kingfisher (7.5), Imperial Brands (7.8), Aviva (8.0), and Sainsbury’s (9.6).
There are plenty more trading at similar levels, so it looks to me like the FTSE 100 is still chock full of cheap shares, so I haven’t missed out.
Naturally, cheap does not always mean good value. Pretty much all of the business I have just listed have their fair share of challenges.
Still FTSE 100 bargains out there
Also, there is no guarantee that cheap shares will automatically do better. Often they are cheap for a reason, say, because profits are falling, dividends are in peril, management is out of its depth, or for countless other reasons.
Before buying any stock, I would always peruse the company’s recent reports and trading statements, and take a sceptical view on where the business is going. Macro events may also play a role in performance. Mining stocks like Anglo American could struggle if Covid lockdowns inflict more damage on the Chinese economy, for example. Taylor Wimpey is exposed to the fortunes of the UK housing market, which is currently shaky.
So it isn’t just a case of diving into cheap shares and hoping for the best. Even after doing my due diligence, things can go wrong. It’s impossible to know everything about a business before buying it, and macro events cannot be predicted with any certainty at all. Who saw last year’s rocketing oil price, and subsequent slump?
I’m pleased to see the FTSE 100 is still full of cheap targets. The next question is which to buy first. I’m spoilt for choice.
