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Value investors will often be attracted to FTSE shares given the relative poor performance of the title FTSE 100 index and comparatively cheap valuations. After all, investors want to buy companies that look cheap and offer opportunities for capital gains or sizable dividend payments.
Down but not out
While UK share and index prices may have slowly risen since the Brexit vote, the reality is that British shares are now cheaper based on their value relative to reported earnings. There are many ways to explain this, but, simply put, global capital (institutions and people's money) has preferred other markets (particularly the United States) and other asset classes (such as bonds and cash) to shares listed in the UK.
However, many investors find opportunities in these types of disappointments. Dividend yields have increased significantly to just over 4% today, up from 3.5% a decade ago, indicating greater passive income potential. By the same token, stocks are simply cheaper in the short term than they were and than their U.S. counterparts. Logic suggests that this will eventually correct itself.
Enthusiastic? Wait a second
While many analysts and investors recognize that FTSE shares are undervalued relative to their potential, the “cheap” label can be misleading. Investors often make investment decisions based on a stock's future performance. However, the UK's economic forecast just isn't that exciting and that means many companies will struggle to generate the kind of profit growth we can expect from the US. With this in mind, market participants may need to be more selective in their investment approach.
Cheap for no reason
Basically, investors want to find stocks that are cheap for no real reason. Companies like Diageo and Unilever They are interesting cases in this regard. They earn most of their revenue overseas, but trade at a discount to their American counterparts.
There is a similar logic to investing in International Group of Consolidated Airlines (LSE:IAG). This blue-chip stock, which is top-rated based on quantitative models, operates airlines such as Iberia, British Airways and Aer Lingus. It serves markets in Europe, North America and Latin America, as well as, to a lesser extent, Asia and Africa.
Despite operating in association with american airlinesWith a strong presence on transatlantic routes and a near-industry-beating return on equity, the London-based company trades at a 25% discount to its closest US peer.
Furthermore, with an increasingly fuel-efficient fleet, a strong track record in fuel hedging and favorable trends in developing markets, IAG appears well positioned to generate strong returns for shareholders over the long term.
However, the company may be more exposed to the impact of regional conflict than its American counterparts. Russia's war in Ukraine has had an impact, making routes between Europe and Asia more expensive. Further conflict-induced fuel price disruption and volatility will not be good for IAG.
However, no investment is risk-free. Some eagle-eyed investors may consider this stock to be at an unjustified discount.
What about getting rich?
Discount FTSE shares can be a great way to start building wealth. However, building generational wealth in the stock market can take time. Achieving market-beating returns will undoubtedly put an investor on the path to becoming richer, especially as the gains accumulate over time.
