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There are still many cheap stocks in the market. FTSE 100 despite the recent rally, and I'm buying as many as I can afford.
I like to look for bargains in UK shares at discount prices. This way, I avoid the risk of paying for frothy, overvalued stocks. Typically, I'll also get higher performance.
However, it is not a guaranteed winning strategy. Cheap stocks are usually cheap for a reason. Turning around a struggling company takes time. Value investors like me need a lot of patience.
FTSE 100 bargains
I've been busy loading up my self-invested personal pension (SIPP) lately. I'm now turning my attention to this year's stocks and Shares ISA.
Looking at the FTSE 100 today, one stock catches my eye. Oil and gas giant PA (LSE:BP) trades at just 6.6 times earnings. That's well below the 15 times typically considered fair value. The stock price has been falling in recent weeks, a period in which Brent crude oil fell below $80 a barrel. In 12 months, the BP share price has fallen marginally, falling 0.25%.
I think this is a buying opportunity, but there is underlying risk. The world is supposedly weaning itself off of fossil fuels. BP is developing its renewable energy capacity, but not as quickly as its activists would like. He knows that the transition to carbon will be costly and risky.
Last week, the International Energy Agency predicted that oil demand will peak in 2029, leading to a significant oversupply. If correct, it would be a blow to Big Oil. It would be good for the planet, but I'm not totally convinced it's going to happen. The world seems to be using more energy than ever and needs every possible source, including fossils. Oil will be with us for a long time yet. In my opinion, BP will too.
<h2 class="wp-block-heading" id="h-top-value-stocks-nbsp”>High value stocks
Like many commodity stocks, BP's share price can be cyclical. That's why I prefer to buy when the price of oil drops and stocks lose popularity, as seems to be the case today. The dividend outlook is positive, with an expected yield of 5.23% in 2024 and 5.56% in 2025. The board has also been generous with share buybacks.
BT is not the only cheap blue chip company offering considerable performance today. China-focused bank HSBC Holdings it trades at just seven times earnings and yields 6.91%. tobacco manufacturer Imperial Brand Group it trades at 7.5 times earnings and yields 7.1%. mining giant Rio Tinto it trades at 9.1 times earnings and yields 6.57%. I could go on.
Let's say I scraped together every spare penny and was able to invest my entire £20,000 ISA allowance, not this year but in future years too.
The long-term average total return of the FTSE 100 is 6.9%. It's not guaranteed, but if I matched that number, it would take me 21 years to earn a million. I would have £1,029,374.
If my carefully selected portfolio of cheap stocks outperformed the index and grew 9% annually, I would get there in just over 18 years. Then there is no time to waste.
