Cheap shares: this FTSE 100 stock has surged 11% in a month. Would I buy now?

This ‘boring’ FTSE 100 stock is one of the cheapest of all cheap shares. After drifting downward for six weeks, the share is soaring. Is it a bargain now?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

When searching for cheap shares, I like to hunt for value in the FTSE 100. That’s because the UK market’s main index is fairly cheap by historic standards. This is partly due to fears over potential economic damage from Covid-19 lockdowns and a no-deal Brexit.

Cheap shares: the FTSE 100 is inexpensive today

One way to identify cheap shares is to examine their CAPE Ratio. This is similar to the familiar price-to-earnings ratio, but measures the 10-year average of inflation-adjusted earnings. This smooths out short-term market movements, making it easier to spot long-term valuation discrepancies.

As this user-friendly chart from Barclays shows, the UK stock market currently has a CAPE Ratio of 14.14, versus 32.07 for the US. In other words, investors are willing to pay 2.27 times as much per unit of US earnings as for one UK unit. For me, this indicates that the US market might be too expensive, while the UK is a haven for cheap shares.

Should you invest £1,000 in Compass Group Plc 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 Compass Group Plc made the list?

See the 6 stocks

Tellingly, the UK market’s CAPE ratio is as low today as it was in September 1990 and March 2003. For the record, the UK stock market went on to soar dramatically after both of these historic lows.

Inexpensive shares lurk within the FTSE 100

Given the uncertainty over the UK’s immediate future, it isn’t surprising that the FTSE 100 is filled with cheap shares. But the index is at the same level today as it was in mid-1998, which is somewhat shocking to me!

Of course, investors like me could just buy the whole FTSE 100 by investing in a low-cost index tracker. However, there are cheap shares in the Footsie that, to me, offer compelling value for patient investors. Take, for example, investment management firm M&G (LSE: MNG), which entered the FTSE 100 last October following its demerger from Prudential.

As one of the smaller FTSE 100 members, M&G’s shares have been extremely volatile. Having peaked at 245.9p on 19 February, this stock then crashed to an all-time low of 84.12p by 18 March. At this point, the stock was crazily, spectacularly, remarkably cheap, in my eyes. M&G’s share price then zigzagged along before dipping to 146.15p on 24 September. In the past month, it has bounced back, leaping 11.5% in four weeks.

Are M&G shares still a bargain today?

On Friday, M&G shares closed at 168.8p, valuing it at £4.4bn. This leaves M&G’s share price at twice the level it hit in the March market meltdown. Yet despite doubling from their all-time low, I think these remain cheap shares today.

Based on forecast earnings, M&G stock trades on a price-to-earnings ratio of 4.1, for an earnings yield of 24.4%. What’s more, its dividend yield is a bumper 7.1%, offering a mouth-watering cash return for income investors. Lastly, M&G aims to generate at least £2.2bn in excess capital over the next three years. Much of this sum — equal to half its current value — will be returned to shareholders in capital returns and extra cash payouts.

I believe M&G’s stock is one of the cheapest shares available in today’s climate. Yes, it’s a small player in a highly competitive industry facing pressure from lower fund fees and investor withdrawals. Yet I see today’s bargain price as more than adequate reward for taking on this risk. That’s why I’d buy and hold these cheap shares, ideally in an ISA to enjoy a flood of tax-free dividends and capital gains!

Should you invest £1,000 in Compass Group Plc 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 Compass Group Plc 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.

Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has recommended Prudential. 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.

More on Investing Articles

Close-up of British bank notes
Investing Articles

£20,000 in savings? Here’s how it could be used to target a £913 second income each month

Christopher Ruane walks through some practicalities of how an idle £20k could be the foundation for a sizeable long-term second…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

5 steps to building monthly passive income with a spare £10k

Christopher explains how an investor could aim to use some spare cash to start building regular passive income streams through…

Read more »

Blue NIO sports car in Oslo showroom
Investing Articles

Tesla’s struggling. Could NIO stock benefit?

NIO stock has moved up very slightly this year, while Tesla has crashed. Our writer considers whether it might be…

Read more »

Two employees sat at desk welcoming customer to a Tesla car showroom
Investing Articles

Could Tesla stock be a brilliant bargain in plain sight?

Christopher Ruane sees some things to like about Tesla, but as its vehicle revenues have gone into sharp decline, is…

Read more »

British coins and bank notes scattered on a surface
Investing Articles

3 cheap FTSE 250 stocks with big dividends to consider buying right now

The FTSE 250's loaded with so many big dividend yields it's hard to know where to start. These three have…

Read more »

Rolls-Royce's Pearl 10X engine series
Investing Articles

Up 585%, could Rolls-Royce shares still go higher?

Christopher Ruane likes the Rolls-Royce business but is not so convinced by the value its current share price offers him.…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

I reckon a bull market’s coming! Here’s what I’m buying for my Stocks and Shares ISA

Hoping to capitalise on what he believes is an undervalued UK stock market, our writer’s added more of this FTSE…

Read more »

piggy bank, searching with binoculars
Investing Articles

The UK stock market looks undervalued to me. Here’s 1 growth stock to consider for a SIPP

Our writer explains why he thinks the UK stock market’s currently in bargain territory, and identifies one share potentially worthy…

Read more »