As a veteran value investor, I aim to track down unloved, overlooked, and unwanted shares in otherwise sound businesses. Right now, scores of stocks fall into that category in the UK’s FTSE 100 and FTSE 250 indexes.
UK shares have lagged behind
Currently, London-listed stocks look about as cheap as they’ve been in the 40 years since the FTSE 100 began on 3 January 2024. Alas, that’s been the case for many years and yet the index has gone nowhere over long periods.
For example, over the past five years, the Footsie has risen in value by just 10.9%. That works out at a simple return of below 2.2% a year. This seems like scant reward for the risks of loss that come with investing in shares.
However, the above figure excludes cash dividends, which are generous from many FTSE companies. For example, the blue-chip index now offers a cash yield of 4% a year — boosting the above return to 6.2% a year.
The S&P was the place to be
Meanwhile, across the Atlantic, the US S&P 500 has been going great guns. Over the past five years, it has leapt by 81.4%, which comes to a simple return of almost 16.3% a year. Adding in the current yearly dividend yield of around 1.5% lifts this return to 17.8% a year.
It’s a similar story over the past 12 months, with the S&P 500 jumping by 21%, versus a tiny loss of 0.7% from the FTSE 100. Fortunately, the vast majority of my family portfolio has been in US stocks since mid-2016, so we’ve benefited hugely from these outsized gains.
Never bet against America
My investing guru, billionaire philanthropist Warren Buffett, once urged investors to never bet against America. I have to agree, as most of my family’s fortune was made there. Then again, US stocks look fully priced to me today.
At present, the S&P 500 trades on a multiple of 21.6 times earnings, delivering an earnings yield of 4.6%. This means that its modest cash yield of 1.5% a year is covered 3.1 times by earnings.
Meanwhile, the UK’s main market index trades on a lowly 10.3 times earnings. This translates into an earnings yield of 9.7% — 2.1 times that of the S&P 500. Furthermore, the FTSE’s dividend yield is almost 2.7 times the US index’s cash yield.
What will I buy in 2024?
With US stocks looking pricey and this market being driven by the ‘Magnificent Seven’ mega-cap tech shares, I’m reluctant to increase our heavy weighting to the American market.
Also, investing theory says that — all else being equal — cheaper assets should produce superior future returns to expensive assets. Of course, in the race between the S&P 500 and FTSE 100, this hasn’t held true for many years.
However, here’s something many investors may not realise. From 31 December 2021 to now, the US index is actually down 1.1%. At the same time, the UK’s leading index is up 4%. Thus, UK shares have actually beaten US stocks on a two-year horizon — while paying out much higher cash returns.
In short, that’s why I see FTSE shares as offering an almost unique opportunity to load the odds in my favour. And that’s why I’ll keep buying more cheap UK shares in 2024/25!
