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At first glance, shares on the London Stock Exchange might not seem so cheap. FTSE 100 Index has hit a series of new all-time highs this year.
However, I still think that many FTSE stocks are cheap. In fact, in a few years we could look at the current market as a great buying opportunity.
In search of value
As a small private investor, I could easily “buy the index“If I wanted to, by buying shares in a tracking fund like Vanguard FTSE 100.
That would allow me to know the good, the bad and the ugly of the performance of large companies. Instead, I could choose (and I do) individual FTSE stocks that I think offer great value to me, rather than buying the index.
This is how I try to spot good stocks to buy
Looking at it that way, I think there are some real deals on offer right now.
However, investing is about pricing the unknown. What seems like a bargain today may turn out to be a value trap later.
So I focus on areas where I am comfortable and understand. Specifically, I look for companies that operate in those fields and have a competitive advantage that I believe can endure.
Then I start looking at the financial attractiveness of the stock. For example, how much debt is there on the balance sheet? How attractive is the valuation of the stock?
An example of a stock I would buy
Let me illustrate with a real-world example.
The FTSE 100 company Diageo (LSE: DGE) is now 25% cheaper per share than it was five years ago. But during that time, the Guinness The brewer has raised its dividend annually. In fact, it has increased the payout to shareholders every year for more than three decades, making it what is known as a Dividend Aristocrat.
Diageo has had some difficulties lately, including lower demand in Latin America. I see one risk that it could be the canary in the coal mine as cash-strapped consumers around the world decide to spend less on their preferred drink.
Over time, though, the strength of the company’s brands and especially their uniqueness should help keep demand high, I think. There are plenty of stouts and porters, but there’s only one Guinness (though it comes in different versions, as any bartender can attest). Guinness’s quality accreditation program includes verification of 17 aspects of how pubs store and serve Guinness.
All JD Wetherspoon Pubs have that accreditation and in May, Spoons chairman Tim Martin told the city: “The fashion gods have smiled on Guinness, once consumed by kids my age but now widely adopted by younger generations..”
Looking to the long term
If I had extra money to invest today, I would happily add Diageo to my portfolio.
The share price has fallen and the FTSE 100 company now trades on a price-earnings ratio of 18.
For a high-quality, blue-chip company like Diageo, I think it offers fair value for a long-term investor like myself.
