Compared to stocks in the US, FTSE 100 companies have been trading on lower valuations for some considerable time.
However, that situation may change if the UK economy starts to outperform in the months and years ahead.
Already, foreign companies and investment institutions have been piling into UK stocks — either buying up companies completely or taking big chunks of their shares.
To outsiders, the values on offer look compelling. But here in the UK, many investors have probably become complacent because shares have looked cheap for so long.
It’s time to wake up though!
A successful turnaround
The most likely process for valuations to rate higher is for share prices to rise. Another way is for company earnings to fall. But I reckon that’s unlikely in the coming years unless we see more unexpected black-swan events that crash the economy.
Personally, I’m not hanging around, and my watchlist is filling up with FTSE 100 bargains.
For example, I’m keen on fashion, homewares and food retail giant Marks & Spencer (LSE: MKS).
After years of struggle and decline, the business is finally turning around under its dedicated and inspirational chief executive Stuart Machin.
I see this as a stock to consider buying and holding for at least five years, and probably a lot longer than that. However, it’s a retail business, so there are risks. Perhaps the biggest is that the sector’s cyclical.
If we see another general economic downturn, it would be easy to lose money on the shares.
A cash-cow business with options
But I’d aim to put the stock in a diversified portfolio alongside another I’m considering, Shell, the energy and petrochemical company.
Again, there are cyclical risks with this one. On top of that, the hydrocarbon business ‘should’ fall into decline if countries manage to transition to alternative energy sources as hoped.
But with the share price near 2,815p, there’s a low-looking valuation on offer here and a dividend yielding more than 4.2% for 2025. City analysts have pencilled in strong increases for the shareholder payment for this year and next, continuing a run of rises since 2020.
As a long-term investment, I think Shell has the potential to perform well. The company has the option of diverting its cash flows into other business areas if the oil and gas business goes into decline.
Such shifts will be unlikely to happen overnight. But Shell may be around for decades to come, perhaps as an even bigger player in greener energy businesses than it already is. My hope is the firm will keep up its dividend payments as it evolves.
An active sector for takeovers
Finally, I’m running the calculator over Mondi, the packaging and paper solutions company.
One risk is the sector’s competitive and it can also be cyclical. But the need for non-plastic packaging is a growing trend, and it’s being amplified by all the internet shopping being done and deliveries needed these days.
There’s been recent take-over and consolidation among other companies in the sector, such as Smurfit Kappa — now Smurfit WestRock — and DS Smith. So I’m keen to focus on Mondi now with a view to picking up a few of the shares.
