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This week, the FTSE 100 The index of leading companies reached an all-time closing high (index archivists analyze both the closing price each day as well as the highs and lows that the index reaches during the trading day).
That might make it seem like now is a bad time to buy FTSE 100 shares, as they are bound to be expensive. In fact, I think in some ways the opposite is true. Right now, I think some leading index stocks are bargain-priced.
Confused? Let me explain!
Price and value
The first point to understand is that price and value are not necessarily the same.
In a perfectly efficient market, they could be, where the price of things is exactly what they are worth (their value). In reality, many times that is not the case. Some stocks may be overvalued relative to their long-term value, while others become cheap.
Therefore, a high level of the FTSE 100 does not necessarily mean that the index is overvalued, just as a low level of the FTSE 100 would not necessarily mean that it is cheap.
A stock index and a stock index.
But whether or not investors think the FTSE 100 index offers value, it is made up of 100 individual stocks. Therefore, it is possible to look for cheap stocks to buy, no matter what the overall index is doing.
Carry Vodafone (LSE: VOD) as an example. While the FTSE 100 has risen in recent years, in the last five years this particular member has seen its shares halve.
The company currently has a market capitalization of £19 billion. However, after-tax profits last year were £12.3bn! The company has a strong brand, a huge customer base and an entrenched position in many markets.
Always look at the details
Given this, Vodafone shares could look almost unbelievably cheap.
In fact, this is an example of why, as an investor, it is important to delve into the details of a company and really understand its accounts.
For one thing, Vodafone's profits last year were exceptionally high. They are normally much lower and after selling businesses recently, I think they could fall from their previous level.
Those asset sales have helped the company reduce debt, but it remains substantial. The company has also announced a significant cut to its dividend next year.
Looking for cheap stocks to buy
Still, all things considered, Vodafone strikes me as a FTSE 100 bargain. I continue to hold it in my stocks and Shares ISA.
Over time, I expect the FTSE 100 index to continue to rise. This is not guaranteed, but it is likely, as it is simply a snapshot of the 100 listed companies with the largest market capitalizations. Therefore, shrinking companies are left out of the index and rapidly growing companies replace them.
In that sense, a FTSE 100 record doesn't mean much to me. What I see as a real opportunity is finding specific bargain stocks within the index.
