The FTSE 100 index – which represents the 100 largest companies on the London Stock Exchange – has surged higher over the last three months. As a result, it’s currently within an inch of its all-time high of 7,877.45 points (it may have even breached this level by the time you read this).
Those who like ‘value’ when investing may be put off by the fact that the Footsie is very close to its all-time high. However, they shouldn’t be. That’s because a look within the index reveals there are still plenty of cheap blue-chip shares to buy today.
The recent highs don’t tell the full story
The FTSE 100 is a ‘market-cap-weighted’ index. This means that the biggest companies in the index (AstraZeneca, Shell, BP, etc) have the largest weightings within it (and the most impact).
Now recently, many of the largest constituents in the index, such as Shell and BP, have seen their share prices rise. This has pushed the FTSE up to within a whisker of a new record.
What’s interesting though is that plenty of Footsie companies remain well below their own all-time highs, and currently trade at relatively low valuations. So there are still plenty of opportunities for those seeking value.
Cheap FTSE shares
One area of the Footsie that strikes me as cheap at the moment is insurance. In this sector, many blue-chip shares trade on single-digit price-to-earnings (P/E) ratios.
Legal & General is a good example. Currently, it has a P/E ratio of just 7.5. The kicker? The dividend yield here is around 7.5%, meaning that if I invested £1,000 in the stock, I’d generate income of around £75 per year (although dividends are never guaranteed).
Another area that appears to offer value at present is healthcare. One stock in this sector I’ve recently been buying for my own portfolio is joint replacement specialist Smith & Nephew. Currently, it has a P/E ratio of 17. I think that’s good value, given the tailwinds the world’s ageing population should provide in the years ahead. To put that valuation in perspective, US rival Stryker currently has a P/E ratio of around 26.
I also think energy shares are cheap. Currently, Shell and BP have P/E ratios of just six, which is less than half the market average. That seems very low to me, given the momentum these companies have right now.
Of course, there are risks here associated with the shift to renewable energy. But at that low multiple, I think there’s potential for share price upside.
It’s important to be selective
It’s worth pointing out that investors need to be very selective when buying cheap shares. Often, stocks with low valuations are cheap for a reason. For example, they may have large amounts of debt on their balance sheets. Debt can create problems, especially during periods of economic weakness.
So it’s important to spend some time on research. It’s also a good idea to spread capital across a number of different shares. This can dramatically improve chances of generating wealth from the stock market.
