The UK is in a pickle but that isn’t going to stop me from buying cheap shares. In fact, I see it as a good time to do so.
The FTSE 100 has dropped below 7,000, after the Bank of England’s battles to prevent a pension fund meltdown and another sterling collapse. It trades at 6,913 as I write this, a drop of 7.89% year-to-date.
It has fared better than the US S&P 500, which is down a brutal 24.49% this year. The FTSE 100 is full of solid, undervalued dividend stocks in sectors like banking, utilities, mining, consumer staples and energy. By contrast, the S&P 500 is packed with overvalued growth stocks that are struggling as sentiment plummets.
I’m looking for cheap shares now
Yet the FTSE 100 has dropped far enough to offer me real value. Some of my favourite shares are available at astonishingly low valuations, as measured by the price/earnings ratio.
Anglo American is trading at 4.2 times earnings and yields a staggering 9.54%. That offsets most of this year’s inflation surge. Like any stock, it is not without its risks. The slowing Chinese economy is hitting demand for raw materials. Given today’s dirt-cheap valuation, that is a risk I’m happy to take.
I’m also tempted by housebuilder Barratt Developments, which is valued at a meagre 4.1 times earnings and yields an amazing 10.8%. Again, there’s a reason why this share is cheap.
UK interest rates look set to rise sharply and this will drive up mortgage costs, forcing some owners to sell as they can’t manage repayments. House prices are likely to fall to match the new reality of higher borrowing costs.
Pharmaceutical giant GSK, formerly GlaxoSmithKline, looks tempting too. Currently, it’s valued at just 11.99 times earnings while its yield has rocketed to 7.12%.
GSK even enjoyed a share price boost this week after its whooping cough vaccine was approved for use in pregnant women in the US. Yet it also faces a specific risk, with a potential $5bn litigation cost for stomach acid treatment Zantac, which may elevate cancer risk. This may not be resolved for several years, weighing on the share price.
FTSE 100 shares at tempting prices
These are big businesses with solid core operations that are astonishingly cheap. That makes me tempted to buy them (although I’ll need to explore GSK’s Zantac issue further).
2022 has been a tough year for markets and the UK now looks set to fall into recession, which could last for all of 2023. Despite all the problems, that won’t stop me from buying shares today for two reasons.
First, wider stock market movements are impossible to predict, so I don’t even try. Second, because I’m investing for a minimum of 15 to 20 years. Over such a lengthy period, any shares I buy today have plenty of time to recover.
The sooner I buy cheap shares like these, the sooner I can start reinvesting their dividends to purchase more stock. By the time the recovery comes, my holdings will be bigger, and with luck I will reap the rewards.
