There are around 2,000 ISA millionaires in the UK, and the number is growing rapidly. The majority have their money in a Stocks and Shares ISA. But how do they find the cheap shares that can generate the biggest gains?
One way is to start by checking out which FTSE 100 shares are on the lowest fundamental valuations.
I’ve been looking for those with the lowest price-to-earnings (P/E) ratios. It’s a fairly basic measure, but I think it’s a good start. Other things being equal, lower is better.
On that measure, the UK’s biggest banks look like some of the cheapest. Barclays is on a forecast P/E of 5.5. That means it would take only 5.5 years of predicted 2023 earnings to cover the price of the shares. Oh, and analysts expect earnings to rise further in the next few years too.
Popular ISA stocks
For Lloyds Banking Group, we’re looking at a higher P/E of seven. But that’s still only about half the average value of the FTSE 100 over the long-term. And again, forecasters expect earnings to grow.
As it happens, Lloyds is one of the most popular stocks held by ISA millionaires. Interactive Investor puts it in the top 10 held by its most successful ISA investors.
There are risks buying bank shares when the economy is down. But ISA investing works best over the long term. And for those with a far-sighted investing horizon, I think the short-term risks are worth taking.
Millionaire favourites
Insurance shares look cheap on P/E terms too. Aviva‘s P/E stands at a fraction over seven, with Legal & General slightly higher at 7.5. Both look cheap to me. And both are among the Interactive Investor millionaire top 10 too.
The FTSE 100 miners don’t make it onto the favourite lists among ISA millionaires. But I do think some of them are looking cheap. Predicted earnings for Glencore, for example, would put the 2023 P/E at approximately 6.5.
The sector is cyclical, and P/E values can be a bit erratic. But with strong dividends forecast, I wouldn’t be surprised to see some miners making it onto the ISA millionaires list in the coming year.
Buy the cheapest?
Should we just buy the stocks on the lowest P/E valuations? I don’t, because shares can often be valued lowly for very good reasons. A low P/E is often good. But if it’s due to falling earnings and rising debt, it can be a problem.
ISA millionaires also buy more highly-valued shares. GSK is popular, for example, on a P/E of 12. And they’ve been buying National Grid, on a ratio of 16.
I try to balance FTSE 100 shares on attractive P/E valuations, paying decent dividends, and carrying low debt. And I’m careful to assess individual risks. I intend to buy more on this list over the coming year. In fact, I’d buy them all today if I had enough cash.
Now, I wonder how many years it will be before the UK can boast 3,000 ISA millionaires?
