3 reasons to think FTSE 100 shares are still dirt cheap

The old adage to “Sell in May and go away” seems like real nonsense this year, with so many FTSE 100 stocks looking cheap in June.

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The FTSE 100 smashed through 8,000 points in April, and hasn’t looked back since. And its climb since 2020 is already making that year’s stock market crash fade into history.

But I think shares in the famous London Footsie still look dirt cheap, and I want to tell you why.

Low index valuation

Compared to other leading stock market indexes, the FTSE 100 is on a significantly lower price-to-earnings (P/E) ratio.

The quoted values depend on who we ask, but it’s around 12 right now, based on forecast earnings. That’s low compared to a long-term average of around 15.

And, it’s also less than half the US S&P 500 P/E, which stands at 28. Interestingly, that’s a bit above the the Nasdaq‘s ratio of 26. With the tech stock index home to some high-flyers, it might still be cheap even though it’s up at record levels.

Now, the FTSE 100’s low valuation today might be justified, considering the UK’s high interest rates and bond yieds. Those make other investments look more attractive. But that can only be short term, surely.

Buybacks and takeovers

If I look at the stock market news on just one day, I see 13 companies in the FTSE 100 buying back their own shares. And there are close to 30 companies doing it on different days at the moment.

It includes Barclays (LSE: BARC), which is returning a big chunk of cash to shareholders.

With Q1 results, the bank announced a “plan to return at least £10bn of capital to shareholders between 2024 and 2026, through dividends and share buybacks, with a continued preference for buybacks“.

That £10bn is nearly a third of the Barclays market cap!

It sure makes me think Barclays rates its own shares as cheap.

The smell of takeovers is in the air too, and we nearly saw Anglo American bought out by fellow miner BHP Group in May. The bid valued Anglo at £34bn, ahead of today’s £29bn, but the board rejected it.

Cheap individual shares

If we think the FTSE 100 is undervalued, we could buy an index tracker. I prefer to choose my individual stocks, though, as too many just look too cheap to me.

I’ve mentioned Barclays, so I’ll look closer at that as an example of why I think the UK’s top shares are good value.

The Barclays share price has done well this year. But we still see a P/E of only seven based on forecasts. And it would drop a lot further by 2026, as low as 4.6, if the analysts have it right.

There’s no real surprise that brokers have a fairly strong buy consensus out for Barclays right now.

The bank does face risks, and I think it’s likely to see margins squeezed when the inevitable interest rate cuts happen. So we might see share price weakness until the UK settles to new long-term rates. I expect volatility, at least.

But I do think Barclays is a shining example of why I see FTSE 100 stocks as cheap.

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.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays 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.

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