Given the choice, I prefer to buy cheap shares rather than expensive ones. Who doesn’t love a bargain?
Shopping for cut-price shares reduces the chance of overpaying for a red-hot momentum stock, just as it runs out of steam. But it’s also risky and requires patience.
Shares are usually cheap for a reason. Profits may have dropped. A tough new competitor may have emerged. The dividend could be in peril. Or maybe the sector’s swung out of favour generally. It’s important to understand why a share’s cheap, before piling in.
The FTSE 100 looks great value to me!
The FTSE 100 started 2024 in top form, quickly racing past 8,000 to peak at 8,445.6p on 15 May. Since then it’s been heavy going.
Investor sentiment slipped after new PM Keir Starmer warned of “difficult decisions” in the Budget on 30 October. Chancellor Rachel Reeves upped the employer’s NI rate from 13.8% to 15%, cut the wages threshold from £9,100 a year to £5,000 and hiked the minimum wage by 6.7%. These changes will squeeze business margins when they come into force next April.
The FTSE 100 sold off again last week in marked contrast to the US, where Wall Street jumped following Donald Trump’s landslide victory.
The UK’s blue-chip index is down 3.94% over the last six months. Over the same period, the S&P 500’s up 14.94%.
Yet I’m wary of the US. The S&P 500 now trades on a price-to-earnings ratio of 30.9. The FTSE 100 is much cheaper at just 16.6 times.
A heap of FTSE 100 stocks look incredibly cheap today. Notably British Airways owner International Consolidated Airlines Group (LSE: IAG).
Like all airlines, IAG was slammed by the pandemic that grounded fleets and destroyed revenues, while fixed costs remained high.
The IAG share price looks like a bargain
IAG survived by gritting its teeth and loading up on debt. Today, as the world flies again, its share price has taken off.
While the FTSE 100 dipped over the last six months, the IAG share price climbed 32.23%. Over one year it’s up a stunning 58.1%.
IAG shares still look astonishingly cheap with a P/E ratio of just 5.87. They also look a bargain as measured by its price-to-revenue ratio of 0.5. That suggests investors only pay 50p for each £1 of sales.
The airline industry sector can be highly volatile. Strikes, bad weather, wars and rising fuel prices can all hit revenues and there’s nothing boards can do about any of them. IAG still had a hefty net debt of €8bn in 2024, although it’s whittling that down.
I can’t imagine that IAG shares will maintain today’s breakneck momentum. However, I said that three months ago and look what I’ve missed.
The FTSE 100 contains plenty of cheap stocks like this one at the moment, which makes now a hugely tempting time to buy shares with a long-term view. So that’s what I’m going to do.
