How to spot a share price bargain

We all like a bargain — at the supermarket, at the DIY store, and when buying a new car or home appliance.
 
And in those situations, most of us know a good deal when we see it.
 
What about shares, though? Here, many people — especially novice investors — are on shakier ground.

Ample data

In one sense, investors have never had it so good, or so easy.

Up until the early-to-mid 1990s, there were few sources of information. Newspapers, for instance, published daily share prices, with the better ones publishing a couple of columns of accompanying data against each stock price.

Then came online dial-up services, such as AOL and CompuServe, where there were online investor forums. Those of us with long memories will recall that The Motley Fool had its beginnings on AOL.

But today, we’ve got the Internet — and with it, countless sources of investment information and data, much of it freely accessible.

Help! I’m drowning

But the fact that it’s there, and for free, doesn’t make it readily understandable.
 
I’ve heard people complain that there’s almost too much information, and that they don’t know what’s important, or where they should be focusing.
 
And those fancy ‘screens’ employed by online investment gurus don’t really help. They’re great sieves, but not much help if you don’t really understand what the specific filters are, or why they were chosen.

So what should investors look at? How should they pick out bargains — or at least, pick out shares that seem to be worth taking a closer look at?
 
Here are three useful starting points, using readily-available information from online free data sources. 

Performance against the broader market

Companies go in and out of fashion, driven by investment sentiment and newsflow. Sectors go in and out of fashion. So do industries, regions, and economies.
 
The underlying fundamentals might be fine. It’s just that something else, somewhere else, is glistening more brightly.
 
How to find such unregarded picks? By comparing market movements, over time.
 
Most data sources will give you a share’s 12-month high point, and 12-month low point. Obviously, a share price that’s close to a 12-month high isn’t of interest, but if it’s close to a 12-month low, it might well be.
 
But how do we strip out the effect of general movements in the market over that period? By charting the share against the market, using your online data source’s charting tool, and comparing the share of interest against its index, such as the FTSE 100 or the FTSE All-Share. (The more broadly-based FTSE All-Share is the better comparator, in my view.)

Footsie up 15% over the past 12 months? Your share of interest down 15%? Hmmm… a potential bargain, in short.
 
More checking is required, to be sure. But it’s certainly a share with the potential to be a bargain — and equally certainly not in ‘expensive bubble’ territory.

Price-to-earnings: the price per pound of profit

Routinely, internet providers of investment data list among their headline data on each share something called a ‘P/E ratio’.

In simple terms, this is a measure of how expensive (or not) a given share is, in terms of the price (P) that you have to pay to get each pound of earnings (E).

‘Earnings’, of course, are the profits that the business makes, and which make up the dividend that is shared with you, the investor and part-owner of the business.

And fairly obviously, it’s better to pay a low price for those earnings, rather than a high price.

What does ‘cheap’ look like? A P/E of 10–15 is reasonable — Shell and GSK, for instance, both fall into that range. 20 is starting to get pricey. And a P/E of 5 or so should have you asking, “Where’s the catch?”

And if your data provider offers a forward P/E, my view is that it’s sensible to use it, as it won’t be unduly influenced by historic data — AstraZeneca’s post-Covid earnings, for instance, are projected to be rather lower than its earnings during the pandemic.

Dividend yield: annual percentage return

Finally, a share’s dividend yield also provides an insight into its relative cheapness.

The dividend yield figure that you see data providers listing is similar to the P/E ratio, except that it concerns the actual dividend that investors can expect.

A dividend of 5p and a share price of 100p? That’s a dividend yield of 5% — meaning that, if profits and the company’s dividend policy stay the same, you should expect £50 of income for each £1,000 invested.

And in terms of bargain-hunting, we as investors — especially income investors — are looking for a higher-than-average dividend yield.

Not suspiciously high, though — that could be because the share price is depressed for perfectly valid reasons, such as a profit warning, or adverse trading conditions.
 
And, as with P/E ratios, I’d argue that forward projections of dividend yield are better than historic ones.

Starting point

There’s more to say, of course. Much more. Yields, P/E ratios — it’s possible to write thousands of words on each, and still leave things unsaid.

But these are the basics, and the essence of each data point.

Don’t forget, though, that this is the just the beginning: a simple screen to highlight potential shares of interest. Then the serious digging begins: taking a look at the past five year’s key performance figures, looking through the annual reports, reading press and analyst coverage, and so on.

Happy hunting!