The biggest companies listed on the London stock market are members of the FTSE 100 index of leading firms. Names such as Shell, Lloyds (LSE: LLOY) and AstraZeneca pepper the index.
But while a lot of such companies have big businesses with proven models, many FTSE 100 shares are trading at low-looking prices.
Could now be the best time in years for me to add some such shares to my portfolio?
Cheap shares
That depends on a couple of things. What price would I pay – and what might I get for my money?
As an example, consider Lloyds. The Black Horse bank is trading at just over half what it cost 10 years ago.
At surface level, the shares look cheap. It sells on a price-to-earnings ratio below 8. Its price-to-book value, a common method for valuing bank shares, also makes it look cheap.
But why? After all, other investors can see what I see about Lloyds – yet the share price remains doggedly low.
Lloyds has real strengths. It has well-known banking brands, a huge customer base and a massive mortgage book. Indeed, it is the nation’s largest mortgage lender.
However, those strengths could also be seen as potential weaknesses. The economy feels fragile and the housing market is in retreat in some areas. If there is a wider slowdown in the housing market, that could eat into profits at Lloyds. In that case, if earnings and the book value of its assets fall, the bank’s shares may not be as cheap as the current share price suggests.
On the other hand, this could turn out to be a brilliant moment to buy Lloyds shares. It is highly profitable. The dividend yield is 6%. If the housing market does not show significant weakness, the current price could turn out to be a real bargain some years from now.
Hunting for quality on sale
Despite that, Lloyds is one FSTE 100 share I will not be buying for my portfolio any time soon. I simply do not like the risk profile until the broader economic outlook looks stronger.
But there are other FSTE 100 businesses I would happily add to my portfolio right now if I had spare cash to invest. I think now could be a good opportunity for FTSE 100 shares, if investors choose carefully.
Take drinks maker Diageo (LSE: DGE) as an example. Its shares have risen 63% over the past 10 years. But lately, they have been falling. They are 17% cheaper now than they were a year ago.
But while the shares have risen in price over the past decade, the business has also grown impressively during that period.
Back in 2013, basic earnings per share were 99.3p. Last year, they came in at £1.65. That increase of 66% means that, roughly speaking, the FTSE 100 share trades today for the same sort of valuation it did a decade ago after emerging from the previous financial crisis.
It does face risks, as a recent sales slowdown in Latin America has shown. Pricy tipples could be in less demand in a weak economy.
But with a stable of unique premium brands such as Guinness, large customer base, as well as extensive global manufacturing and distribution operations, Diageo looks like a promising business to me from a long-term perspective.
