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FTSE 100 hits 19-month high: is it too late to buy cheap stocks?

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Screen of various price trends, possibly in FTSE 100
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On Friday morning, the FTSE 100 hit its highest level since the market crashed in February 2020. The index of blue-chip stocks rose to 7,242 in early trading and is at 7,220 as I write — levels not seen since before the pandemic begun.

Today, I want to explain why the market’s rising and why I’m still confident I can find good, cheap stocks to buy for my portfolio.

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Why is the market rising?

It might seem odd that the market is rising when news headlines are so bad. Businesses all over the world are being affected by shipping delays, rising transport costs and high energy prices. Surely that must be bad for profits?

I certainly think we could see some problems in the new year. But right now, I can see two clear reasons why the FTSE 100 is rising.

The first is that high oil and gas prices are providing a boost for some of the biggest companies in the index, such as BP and Royal Dutch Shell. These heavyweights have a combined market-cap of £211bn.

This makes them more valuable than the 40 smallest companies in the index combined. If the Shell and BP share prices move in the same direction, that’s often enough to move the whole index. I think that’s what we’re seeing today.

Is the FTSE 100 expensive?

Is the FTSE 100 expensive? I don’t think so, not really. Profits at many companies have recovered well since last year, boosting corporate earnings. For the lead index as a whole, the average price/earnings ratio is now 15, while the dividend yield is 3.4%.

That seems reasonable value to me. If I was investing in an index tracker, I’d be happy to continue buying the FTSE at this level.

Of course, these figures are only an average. The index is made up of 100 different companies, from a wide range of sectors. All of these are valued differently. Some individual shares do look expensive to me. Some look cheap.

As a stock-picking investor, what I’m doing is focusing on companies I think are both good and cheap. Here are three examples.

Cheap FTSE shares I’m buying

One FTSE 100 stock I’ve been buying recently is consumer goods giant Unilever. This firm’s brands are used by billions of people worldwide. I’m certain we all have at least one in our homes. Unilever’s profits have come under pressure this year from rising costs. But, in my view, this is still a great business.

With the shares under £40, the stock yields 3.7% and looks decent value to me as a long-term buy.

Another stock I think could be underpriced at the moment is tobacco group Imperial Brands. Not withstanding ethical issues, there are obviously concerns about growth. But management is streamlining this business. Profits and cash flow remain pretty stable. Imperial’s 9% yield looks safe to me.

The final FTSE 100 share I’ve bought recently is Legal & General Group. This asset management and retirement powerhouse has a long track record of high returns and steady growth. Profits could suffer in a recession, but with a dividend yield of 6.8%, I reckon LGEN is probably too cheap.

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Roland Head owns shares of Imperial Brands, Legal & General Group, and Unilever. The Motley Fool UK has recommended Imperial Brands and Unilever. 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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