Buy low, sell high. So goes the old investing mantra. And there’s a strong case that value investors should consider starting their searches for investments to buy low among the ranks of UK shares listed on the London Stock Exchange.
Indeed, many FTSE 100 and FTSE 250 stocks have struggled in recent years. Trading conditions have been challenging, marred by Brexit, the pandemic, and rising geopolitical instability.
So, do beaten-down valuations mean UK shares present golden investment opportunities today? Or do the risks outweigh the potential returns?
FTSE 100 stocks
Currently, the FTSE 100 index trades at a relatively attractive price-to-earnings (P/E) ratio compared to other popular indexes. On this valuation metric alone, Britain’s leading benchmark looks significantly cheaper than both the S&P 500 and the FTSE All-World Index.
| Stock market index | P/E ratio |
|---|---|
| FTSE 100 | 9.6 |
| FTSE All-World | 15.8 |
| S&P 500 | 21.9 |
Although they may offer cheap multiples today, it’s worth noting many FTSE 100 shares have disappointed long-term investors in recent years.
Since November 2018, the index has effectively flatlined, delivering anaemic growth of under 5% in half a decade. Meanwhile, the S&P 500 has advanced 57%.
However, earlier this year the FTSE 100 staged an impressive rally, breaking the 8,000 point barrier for the first time. Moreover, its dividends are world-leading, so there’s plenty to please passive income seekers.
Some examples of individual Footsie shares investors could consider buying include:
| FTSE 100 stock | P/E ratio | Dividend yield |
|---|---|---|
| Glencore | 7.0 | 9.8% |
| GSK | 9.4 | 4% |
| HSBC | 5.4 | 4% |
FTSE 250 stocks
Arguably, the FTSE 250 might offer even more bargain investment opportunities than Britain’s premier index. With a P/E ratio of just 10.9, it no longer trades at a substantial premium compared to the FTSE 100.
Indeed, many analysts argue the mid-cap stocks in the index might have greater growth opportunities than the largest UK shares. History suggests there’s something in this. Since their respective inceptions, the FTSE 250 has outperformed the FTSE 100 with an average annual total return of 10.6% compared to the latter’s 7.2%.
For investors looking to buy individual FTSE 250 shares, there are interesting options to consider. They might include low-cost airline carrier easyJet for a post-Covid travel recovery play, specialist bank Investec for emerging markets exposure coupled with a chunky dividend, or software provider Kainos Group for a proven track record of revenue expansion.
Risks
All stocks face volatility risk. The FTSE 350 shares cited in this article are no exception. That applies to index funds too, despite being well-diversified across different companies and sectors. Although many investors have made significant riches in the stock market, fortunes have been lost too.
In addition, UK shares only make up around 4% of the total global stock market’s value. Granted, many British companies have a significant international presence. Around 82% of FTSE 100 revenues come from overseas and 57% for the FTSE 250.
Nonetheless, investors may wish to consider adopting exposure to international shares too. After all, UK shares have underperformed US stocks by a significant margin since 2008.
Yet, despite the risks facing the UK stock market, I think today’s valuations have created several attractive entry points. This could potentially be an excellent wealth-building opportunity for a long-term investor like me. So I may not get ‘rich’, but I could get richer!
