After the FTSE 100 index of leading blue-chip shares hit a new all-time high last month, it could seem that top UK shares may now be overpriced.
In fact, I think there are potentially some great bargains to be found this February!
What a high index does and doesn’t tell us
The FTSE 100 is made up of the 100 London-listed companies with the biggest market capitalisations.
Over the decades, as declining companies slip out and growing ones take their place, I would expect the index to keep moving broadly upwards, though there could be substantial volatility along the way.
One way for me to try and take advantage of that would be to invest in a fund that tracks the FTSE 100 index.
That would mean I could invest without needing to do a lot of research into individual shares myself. My portfolio ought also to benefit from the strong performance of some index members.
The flipside is also true, though: I would be saddled with the poor performance of the weaker FTSE 100 shares.
That helps explain why I prefer to buy individual shares rather than invest in an index tracker.
As for what a record high index level tells us as investors? In my view, not necessarily much of actionable use.
What the index is at now and how it compares to the past is not useful for me. What I want to know – or at least take a view on – is whether it is undervalued or overvalued compared to what I think is its likely future value.
Buying individual shares
To make that judgement at the index level strikes me as difficult.
Sure, I could consider its price-to-earnings ratio as a proxy. But I like to invest in what I know – and I do not know all 100 of the top FTSE businesses well enough to take a view on whether their current valuations are reasonable or not.
But I can do that in the case of individual shares.
Fortunately, despite the index price, I think there are still some potential bargains even among well-known FTSE 100 firms.
One share I’ve been buying
As an example, consider my shareholding in retailer JD Sports (LSE: JD).
I already owned the FTSE 100 firm in my portfolio, but have been taking advantage of a recent share price fall (JD has tumbled 12% so far this year alone) to add more.
Could the JD price keep falling from here?
I think it may. Multiple profit warnings in the past year – including one last month – have shaken City confidence in the investment case. A weak economy could hurt discretionary consumer spending on things like pricy trainers.
Still, as a long-term investor that does not bother me.
I think the JD Sports share price, which has halved in the past five years, now looks like a possible bargain for a proven and highly profitably business I expect to keep growing in years to come.
With a strong brand, expanding international shop footprint, large digital operation, and enthusiastic customer base, JD Sports seems like a brilliant FTSE 100 business to me – selling for a knockdown price.
