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The FTSE 100 has surged, but I’d keep buying these cheap shares!

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Since the end of October, the FTSE 100 has surged 15%! Investor sentiment has improved dramatically off the back of two positive coronavirus vaccine updates. These updates have raised investor hopes that the end of the pandemic could be in sight. 

However, despite this performance, some FTSE 100 shares are still trading at attractive levels. As such, I’m looking to buy a basket of these stocks to capitalise on improving investor sentiment over the next few months. 

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FTSE 100 cheap shares

One of the blue-chips on my list of cheap shares is defence group BAE Systems (LSE: BA). The business has weathered the pandemic exceptionally well. The firm cancelled its dividend at the beginning of the epidemic. However, it was one of the first FTSE 100 stocks to resume its payout over the summer. 

BAE has benefited from the steady demand for defence equipment over the past few years. This has helped the firm build a large order backlog. As it works through these orders, group sales have ticked higher this year. 

And it looks as if even more orders are in the pipeline. In the past month alone, the company has announced 12 new contracts. These included a £1.3bn order to support the production of 38 Eurofighter Typhoon aircraft for the German Air Force.

I reckon this steady stream of orders, and the company’s backlog will help it generate profits for shareholders in the long run. That’s why I’m eyeing up the stock for my portfolio today. The business’s growth potential, coupled with its 4.7% dividend yield, offers the perfect blend of income and growth, in my opinion. 

Growth champion 

Croda International (LSE: CRDA) has similar attractive qualities to its FTSE 100 peer BAE, according to my research. Both groups operate in highly specialist markets, where skill and experience are more valuable than the cost. As two of the largest firms in their respective sectors, this suggests the companies have considerable competitive advantages. 

Croda manufactures high-performance ingredients and technologies in some of the biggest, most successful brands in the world. To boost its product roster, the business recently agreed to buy fragrance manufacturer Iberchem for €820m. I think this deal will fit nicely into Croda’s existing portfolio and complement its cosmetic-ingredients division. 

The company has a strong track record of growth through acquisitions. These deals have helped the business grow earnings at a steady rate over the past five years. And, assuming the firm continues on this path, I see no reason why it cannot repeat its performance over the past five years in the next five. That suggests investors should see healthy returns from the stock in the medium term. 

The potential for capital gains isn’t the only reason why I’m considering this company for my portfolio of FTSE 100 shares. The stock also supports a dividend yield of 1.5%, which looks extremely attractive in the current interest rate environment. This combination of income and capital growth is just what I look for in a long-term investment. 

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Croda International. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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