In all the years I’ve been buying FTSE 100 shares, I don’t think I’ve ever seen so many that I think are too cheap as right now.
Some have done well on the back of strong business. Others have fallen as profits have been squeezed.
And then there’s a lot where I see a mismatch between company performance and share prices. They’re the ones I rate as the top buys right now.
Is this what happened?
I have some ideas of how this might have come about. In good stable times, share prices are driven more by analysis of actual company performance.
But in tough times, that can be a lot harder as we have far less good news to go on. And sentiment, hope, fear, gut feeling, or whatever we call it, can all play a bigger part.
Look at the Rolls-Royce Holdings (LSE: RR.) share price. In the past 12 months, investors have pushed it up by 175%, and it’s even a few percent ahead over five years.
A 2023 success
It’s one stock where we saw positive performance that we can count… in sales, profit, cash flow, debt… And when it’s one of a fairly small number like that, we can see a disproportionate amount of cash following it.
Now, I’m not knocking Rolls-Royce shareholders. Their success has been a joy to see. And I think the shares may well be fair value now.
That’s based on what look like fairly ambitious forecasts, mind. And if they fall short, we could see… well, maybe better buying opportunities in the future.
Cheaper stocks?
This all leads me to ask one key question.
Why do people buy Rolls shares on a price-to-earnings (P/E) ratio of 30, when we can buy Barclays shares at a P/E of just five and a big dividend yield?
Does Rolls-Royce really have six times the outlook for total returns? Does Barclays carry six times the risk?
We just don’t have upbeat numbers for the banks. We don’t know what bad debts, and impairments, they’ll need to report.
No picks, no shovels
Have you heard of so-called picks and shovels stocks, named after the great gold rush? Whoever found the gold, those selling the tools and supplies made good profits.
Right now, I think investors see banks as the opposite.
The economy is down, interest rates are high, and we’re all hurting.
And no matter who hurts the most, the banks should suffer because they’re behind all other businesses.
What to do?
What do I plan to do? I’ll keep on looking for the stocks that have the most uncertainty, because that’s where the fear lies. The fear that keeps so many investors away.
And, I hope, keeps the mismatch between share prices and underlying fundamental valuations going for as long as possible. So I can buy as many as I can.
When we have these mismatches, that’s when I think we have the best prospects for the next decade. I might be wrong, but it’s exactly what I see right now in 2024.
