The FTSE 100 still looks cheap to me. But don’t just take my word for it!

The FTSE 100 (INDEXFTSE:UKX) has increased 7.5% since the start of 2024. But I think there’s evidence to suggest that it still offers good value.

| More on:

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Despite reaching a record high on 7 May, I believe the FTSE 100 remains undervalued. I think this is borne out by a comparison of UK equities with those in Europe and North America.

The MSCI United Kingdom index contains mainly Footsie companies and — using three common valuation measures — implies they’re cheap compared to their international peers (see table).

IndexForward price-to-earnings ratioDividend yieldPrice to book ratio
MSCI United Kingdom11.53.71.9
MSCI Europe (excluding United Kingdom)14.13.02.2
MSCI North America19.91.54.4
Source: MSCI / data at 30 April 2024

In my opinion, further evidence of the excellent value UK stocks currently offer can be found in recent approaches to buy some of the country’s largest listed companies.

Although there are many reasons why one company might want to buy another — growth, access to new markets and cost savings through economies of scale — none make commercial sense if the target is expensive.

Therefore, the fundamental driver of any deal is the acquirer getting what it wants at a reasonable price. And attractive valuations appears to be the main reason behind some recent takeover activity.

Battle of the giants

BHP is seeking to buy Anglo American (LSE:AAL) because it wants to control its copper mines in Chile and Peru. But the FTSE 100 mining giant has turned down three approaches from its larger Australian rival.

The proposed deal is a complicated one requiring the disposal of Anglo American’s platinum and iron ore businesses. The board has warned that the entire process is likely to take 18 months and says it “carries significant execution and completion risks relating to both value and time”.

According to BHP, its “final offer” values the company at £31.11 a share. Anglo American’s board it being more creative saying that it equates to ‘only’ £29.34. However, this is based on the company’s share price before the first offer was made.

Investors don’t appear to believe either figure. Its shares closed on 24 May at £26.15.

As a shareholder, I have a vested interest.

I bought shares in Anglo American fully understanding the risks associated with investing in mining stocks.

Volatile commodity prices, uncertain earnings and political instability are just three of the risks that mean investors often avoid the sector. And ethical investors wouldn’t touch the industry with a bargepole.

But the company has enormous reserves of precious metals, particularly copper. This commodity is essential if the world is to successfully transition to net zero.

And I think the BHP takeover approach supports my view that the stock is undervalued, like others in the FTSE 100.

Industry consolidation

In April, DS Smith, the packaging company, agreed a deal with International Paper Company valuing it at £5.8bn. That’s 30% more than its market cap before details of the approach were released. The valuation was helped by Mondi starting a bidding war by launching its own takeover attempt for the company.

In the same month, cybersecurity firm, Darktrace, was taken private at a value of £4.3bn. That was 44% higher than the company’s average stock market valuation in the three months prior to the deal.

In February, Barratt Developments announced plans to buy Redrow, a fellow housebuilder, at a 27% premium to its pre-announcement valuation. The deal is currently being investigated by the UK’s competition authority.

However, although interesting, takeover activity can be a distraction. I try to ignore speculation about possible deals. Instead, I buy what I perceive to be undervalued shares and hold them for the long term.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Beard has positions in Anglo American Plc. The Motley Fool UK has recommended DS Smith and Redrow Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young black man looking at phone while on the London Overground
Investing Articles

This 10.6% yielder beats every dividend share on the FTSE 100. Can it last?

Harvey Jones couldn't resist the double-digit yield on offer from this FTSE 100 stock. Now he'd like to get some…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

With the FTSE 100 flying, I love the look of this company

The FTSE 100 index has been in rally mode over the last few months, but I think one of it's…

Read more »

Investing Articles

17% of my Stocks and Shares ISA is invested in these 2 UK shares

Stephen Wright looks to focus on investments in companies that have strong competitive advantages. And two UK shares stand out…

Read more »

Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA into Lloyds shares

Harvey Jones bought Lloyds shares last year and is kicking himself for failing to buy even more of them. The…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

Apple is still my favourite company in the S&P 500, here’s why

Apple recently unveiled a lot of new software at a developer conference. Here's why the tech giant is still my…

Read more »

Investing Articles

5 great value UK companies I’d buy in a Stocks and Shares ISA and aim to hold for decades 

Harvey Jones is getting to work on his Stocks and Shares ISA. He thinks these five firms have solid income…

Read more »

Value Shares

Are GSK shares a bargain after falling 11%?

GSK shares have taken a hit in recent weeks due to Zantac uncertainty. Here, Edward Sheldon looks at whether they’re…

Read more »

Investing Articles

Nearing £5, could the Rolls-Royce share price hit £6?

The Rolls-Royce share price has soared in the past year. Our writer thinks there could be a strong runway ahead…

Read more »