MARKET COMMENT
Six Cheap Blue-Chip Businesses For 2004

By Bruce Jackson (TMFGoogly)
December 30, 2003

I remember the days...when shares were cheap. Really cheap. So cheap that you couldn't help but make money. The market was teeming with cheap shares. Everywhere you looked, you found cheap shares. Good companies were cheap. Bad companies were cheaper. Ahh...those were the days!

The period I'm talking about was between January and June 2003. It encompassed a period of extreme stock market volatility, including the FTSE 100 plunging to a close of 3,287 on 12 March.

It was a uniquely attractive time to be buying shares. Panic had seized the market, with many people predicting the downfall of life assurance companies, among others. At that time, the market's downward spiral appeared to have no bottom. Predictions of the Footsie falling below 3,000 were commonplace, with some going as low as 2,500 and others probably going even lower.

Some quality companies were trading at very attractive prices. My wife, being a very astute investor, bought shares in these three firms...

Barclays (LSE: BARC) - 330p

At the time, Barclays' price-to-earnings ratio (P/E) was about seven, with the dividend yield about 6.5%. A good company going very cheap. Its shares currently trade at about 490p.

Legal & General (LSE: LGEN) - 70p

Back then, L&G's P/E was about nine, with the dividend yield about 7%. A well-managed and well-funded company, arguably the best in the industry, going very cheap. L&G shares currently trade at about 99p.

Reuters (LSE: RTR) - 102p

At 102p, Reuters' dividend yield was about 10%! They were (and still are) a company with cash in the bank, a strong competitive position, a quality brand, but were going through a tough time. The shares now trade at 240p. My wife sold at 195p, the klutz!

These weren't the only cheap businesses around: there were stacks of good companies selling on the cheap. If you had the guts to buy during this period, it was hard to make many investing mistakes.

Cheap Shares For 2004

While it's can be quite satisfying to look selectively at your portfolio's performance in the rear-view mirror, this normally doesn't help its future performance. We're unlikely to see the extreme volatility of 2003 next year. We're also unlikely to see numerous, solid, FTSE 100 companies yielding 7% and above. Investing in 2004 will probably be a fair bit harder than it was in the early part of 2003!

But don't despair: cheap companies are out there. They just lack the value of the cheap companies of early 2003.

A quick trawl of FTSE 100 companies reveals the following cheapish, solid companies. They're not quite cheap enough for my wife - she's still looking for good companies on P/E's of eight or below, having been spoilt for choice in the first half of 2003. Mrs J may be waiting some time for many of them to appear on her radar, but she's got patience, which is one of the most under-rated virtues of the share picker.

Happy investing in 2004 and beyond.

The author has a beneficial interest in Barclays and Legal & General.