With a P/E ratio of 3.4, is the cheapest stock on the FTSE 100 index a bit of a bargain?

After applying a popular valuation technique to all the stocks on the FTSE 100 index, our writer’s found the cheapest. But should he buy it?

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I believe the stock on the FTSE 100 index that’s presently offering the best value (at least in statistical terms) is Pershing Square Holdings (LSE:PSH). That’s because it has the lowest historical price-to-earnings ratio (P/E) of all 100 companies.

With a current (13 September) market cap of £6.52bn — and net income for the year ended 31 December 2023 (FY23) of $2.54bn (£1.93bn) — it has a P/E ratio of 3.4.

That’s very low (the average for the index as a whole is four times higher) and suggests the stock could be in bargain territory.

Should you invest £1,000 in NatWest Group right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if NatWest Group made the list?

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Or is it?

Crunching the numbers

The first thing to note is that Pershing Square is not a trading company, it’s an investment trust. Therefore, its P/E ratio is not particularly meaningful.

For investment trusts, a better measure of value for money is to compare its market cap with the net asset value (NAV) of the companies in which it’s invested. At 31 August 2024, its NAV was £50.98. At the moment, its shares are changing hands for around £35.60, meaning they trade at a 30% discount.

This is a big differential. For comparison, the Scottish Mortgage Investment Trust discount is 12%.

Again, Pershing Square looks cheap to me.

What’s more, the return on its investments has beaten the wider market since it was formed in 2004. During this period, it’s achieved annualised growth of 15.7%. This compares to a 10.1% return from the S&P500.

Source: company reports

This performance has helped contribute to a 124% increase in the trust’s share price, since September 2019.

Created with Highcharts 11.4.3Pershing Square PriceZoom1M3M6MYTD1Y5Y10YALL13 Sep 201924 Feb 2025Zoom ▾Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '24Jul '24Jan '25202020202021202120222022202320232024202420252025www.fool.co.uk

What’s not to like?

All this sounds very positive.

Who wouldn’t want to buy into a something that’s selling for significantly less than the value of its investments, and has a long track record of delivering growth?

Well, I do have some concerns.

First, its portfolio is concentrated in a small number of stocks.

It typically invests in eight to 12 North American companies. Current holdings include Universal Music Group, Hilton, Restaurant Brands International and Alphabet.

The principal reason for investing in a trust is to spread the risk across multiple companies through just one shareholding. This advantage is diminished with such a small number of positions.

I’m also wary that the trust is 100% exposed to North America. There’s increased speculation that a recession is coming there, which would severely impact, for example, the leisure companies that Pershing Square has in its portfolio.

Also, its investment manager charges an annual fee of 1.46%.  I’m sure it will argue this is justified given its performance. But I feel this is expensive — Scottish Mortgage’s manager charges 0.3%.

What should I do?

However, taking these concerns into account, now could be a good time to invest.

The significant discount to its NAV is attractive. I’d have to pay approximately 30% more if I wanted to invest in the same companies that Pershing Square has in its portfolio.

Of course, we all know that shares can go down. But there’s presently quite a big buffer which gives some downside protection.

That’s why it’s going on my watch list for when I next have some spare cash.

But what does the head of The Motley Fool’s investing team think?

Should you invest £1,000 in NatWest Group right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if NatWest Group made the list?

See the 6 stocks

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. James Beard has no position in any of the shares mentioned. The Motley Fool UK has recommended Alphabet. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Like buying £1 for 51p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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