This week, the FTSE 100 index of leading companies hit an all-time closing high (index archivists look at both the closing price each day and also the highs and lows the index hits within the trading day).
That might make it sound like now is an awful time to buy FTSE 100 shares as they are bound to be expensive. In fact, I think the opposite is true in some ways. Right now, I reckon some lead index shares are priced as bargains.
Confused? Let me explain!
Price and value
The first point to understand is that price and value are not necessarily the same thing.
In a perfectly efficient market, they might be, where things are priced at exactly what they are worth (their value). In reality, that is often not the case. Some shares may be overpriced relative to their long-term value, while others go cheap.
So a high FTSE 100 level does not necessarily mean the index is overpriced just like a low FTSE 100 level would not necessarily mean it is cheap.
A share index and an index of shares
But whether or not investors think the FTSE 100 index offers value, it is made up of 100 individual shares. So it can be possible to hunt for bargain shares to buy, no matter what the overall index is doing.
Take Vodafone (LSE: VOD) as an example. While the FTSE 100 has moved up in recent years, over the past five years this particular member has seen its shares halve.
Currently, the company has a market capitalisation of £19bn. Yet post-tax profits last year were £12.3bn! The business has a strong brand, huge customer base and an entrenched position in many markets.
Always look at the details
Based on that, Vodafone shares might seem to be almost unbelievably cheap.
In fact though, this is an example of why, as an investor, it is important to dig into the details of a company and really understand its accounts.
For one thing, Vodafone’s profits last year were exceptionally high. They are normally far lower and after selling off businesses recently, I think they could drop from their previous level.
Those asset sales have helped the company reduce debt, but it remains substantial. The company has also announced a swingeing cut to its dividend next year.
Hunting for bargain shares to buy
Even so, on balance, Vodafone looks like a FTSE 100 bargain to me. I continue to hold it in my Stocks and Shares ISA.
Over time, I expect the FTSE 100 index to keep rising. That is not guaranteed but it is likely, since it is simply a snapshot of the 100 listed companies with the biggest market capitalisations. So shrinking companies fall out of the index and fast-growing ones replace them.
In that sense, a record high FTSE 100 does not mean much to me. What I see as the real opportunity is finding specific bargain shares inside the index.
