Share prices may have risen sharply in the days since news of effective Covid-19 vaccines, but I think there is still time to buy bargain FTSE 100 shares.
The UK’s largest stock market has gained a healthy 15% since late October. And that’s good for my existing holdings. But I’m still eyeing bargain FTSE 100 shares at attractive valuations today.
I’m planning to avoid some of the more fragile debt-laden FTSE 100 shares popular with day traders. These include Cineworld (£6.6bn in debt) and Carnival (£13.5bn in debt). But high-quality, profitable, bargain FTSE 100 shares are on my radar.
Buying opportunities
Cheap FTSE 100 shares are everywhere once you start to look. In times of relative peace and calm, the valuations of ‘bargain’ companies are much higher than today.
To prove this point, we need only compare the average price to earnings (P/E) ratio of the FTSE 100 now with earlier years. Across 2020 the average P/E ratio of the FTSE 100 was around 14.6. In 2017, it was over 22. In 2016, it was more than 33.
I would conclude that there were far fewer bargain FTSE 100 shares on sale in the mid-2010s.
Longer risks
The pandemic has been a classic example of how investor sentiment can switch from positive to negative in a very short space of time. News of the first wave of Covid-19 vaccines swung the needle back from pessimism to optimism again.
Today’s FTSE 100 rally could fall away if the effectiveness of these wonder drugs is not borne out in reality.
If the treatments from Pfizer, Moderna, Astrazeneca or Johnson & Johnson aren’t as effective as claimed? If there are more severe side effects than people expect? We could be back in the throes of another stock market crash in 2021. I’m not hoping for this scenario. But investors have to be realistic and deal with the prospect of risk.
And amid all this sentiment whiplash is where cheap FTSE 100 shares tend to appear.
Further ahead
But I would avoid FTSE 100 shares at extremely low P/E ratios, because there are normally skeletons in their closets. By this I mean long-term structural debt that is difficult to escape, even if sales return to normal over the medium term.
Instead I would be looking at companies whose products are in demand, whether lockdowns are ongoing or restrictions have been lifted.
At an undemanding 12 times revenue, chemicals giant Johnson Matthey could be worth me considering, for example. Shares with classic defensive properties and stable earnings like pharmaceuticals and tobacco also head to the top of my list.
One other example of a FTSE 100 company I particularly like because of its attractive valuation is defence giant BAE.
There are definitely still risks on the horizon, to my mind. But I’m looking closely at such bargain FTSE 100 shares to add to my portfolio.
