The chance to buy a small stake of a giant company like Vodafone for pennies – and be paid to own it – may sound too good to be true. But the telecom giant is just one of many FTSE shares that currently trade at what I see as a cheap valuation.
In Vodafone’s case the share price is pennies and there is an annual dividend yield of over 10% to boot. Dividends are never guaranteed, but one of the things I like about investing in large companies in the FTSE 100 is that they mostly have proven business models.
That is why, if I had spare cash to invest right now, I would happily start snapping up FTSE shares I think look like bargains.
Hunting for bargain shares to buy
But are FTSE shares as cheap as I think? Take Vodafone as an example. A share price in pennies and double-digit yield could make it a bargain. But it could also indicate a possible value trap.
Maybe some investors are shunning the stock due to concerns about its debt load and potentially limited growth opportunities.
So when I look at a share and ask it is a bargain, what exactly do I mean?
The answer is not just about the share price. Rather, it is about the value I think the share offers me. Do I think the company is worth markedly more than its current share price suggests, based on its future earnings potential?
Quality on sale
An example of one such FTSE 100 share I have been adding to my portfolio this year is JD Sports.
I think that, over the long term, demand will be robust for sports- and casualwear. I do see risks. For example, tight household budgets could cut shoppers’ willingness to splash out on pricy brands.
As a long-term investor though, I think the outlook for JD Sports looks strong. Not only is demand for the products it sells likely to be high, but the firm has a proven business model that has been profitable in multiple countries. Aggressive growth plans could help it scale up its business.
Yet the JD Sports share price is only around seven times its expected headline profit per share before tax and adjustments for this year.
Why buy now?
Where the stock market goes next is never known. Many FTSE shares may seem cheap at the moment. But they could still get cheaper from here.
So why would I buy now? Rather than trying to guess where the market might go, my focus as an investor is roundly on whether I think I can buy shares in great companies for substantially less than they are worth.
If they then move down further in price, I do not see that as cause for alarm. In fact, it may even provide me an opportunity to buy even more of the shares at a bigger discount to what I see as their real value.
