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He FTSE 100 It surpassed 8,000 points in April and hasn't looked back since. And its rise since 2020 is already making that year's stock market crash history.
But I think the famous London Footsie's shares still look very cheap, and I want to tell you why.
Low index valuation
Compared to other leading stock indices, the FTSE 100 has a significantly lower price-to-earnings (P/E) ratio.
Quoted values depend on who you ask, but right now they're around 12, based on expected earnings. That's low compared to a long-term average of around 15.
And it's also less than half of the US. S&P 500 P/E, which stands at 28. Interestingly, that's a little above the NasdaqThe ratio of 26 is 26. Since the tech stock index is home to some high-flying companies, it could still be cheap even though it has risen to record levels.
Now, the current low valuation of the FTSE 100 could be justified, considering the high interest rates and yields on UK bonds. This makes other investments seem more attractive. But that can surely only be short term.
Buybacks and acquisitions
If I look at the stock market news on a single day, I see 13 companies in the FTSE 100 buying back their own shares. And there are about 30 companies doing it on different days right now.
Includes Barclays (LSE: BARC), which is returning a huge amount of cash to shareholders.
With the results of the first quarter, the bank announced a “plans to return at least £10bn of capital to shareholders between 2024 and 2026, through dividends and share buybacks, with a continued preference for buybacks“.
That £10 billion is almost a third of Barclays' market capitalization!
It sure makes me think that Barclays rates its own shares as cheap.
The smell of acquisitions is also in the air and we almost saw Anglo-American purchased by a fellow miner BHP Group In May. The offer valued Anglo at £34bn, up from the current £29bn, but the board rejected it.
Cheap individual stocks
If we think the FTSE 100 is undervalued, we might buy an index tracker. However, I prefer to pick my individual stocks as many seem too cheap to me.
I've mentioned Barclays, so I'll look at it further as an example of why I think the UK's top shares are good value for money.
Barclays' share price has performed well this year. But we still see a P/E of only seven based on forecasts. And it would fall much more by 2026, to 4.6, if the analysts are not wrong.
It's not really surprising that brokers have a pretty strong Buy consensus for Barclays right now.
The bank faces risks and I believe it is likely to see its margins squeezed when the inevitable interest rate cuts occur. Therefore, we could see share price weakness until the UK adopts new long-term interest rates. At least I expect volatility.
But I do think Barclays is a shining example of why I consider FTSE 100 stocks to be cheap.
