Last week was a landmark week for the London stock market, with the flagship FTSE 100 index of blue-chip shares hitting a new all-time high.
Despite that, some FTSE shares continue to look like a potential bargain to me.
How can that be?
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The forest is not the same as the trees
Imagine the FTSE 100 index as being like 100 trees planted in a field.
The height of the forest canopy could be higher than ever before – but that does not mean that all the trees in the cluster are higher than they have ever been. Some could have shrunk, but that is obscured by taller trees when looking at the forest from a distance.
In the same way, despite the recent FTSE 100 high point, some members of the prestigious index have basically been treading water over the past year, while others have sunk significantly.
One beaten down FTSE share to consider
As an example of the latter category we have Associated British Foods (LSE: ABF).
Its share price has lost 19% in the past year alone as part of a 29% decline over a five-year period.
That means that the firm now offers a dividend yield of 3.3% and trades on a price-to-earnings ratio of just under 10.
But I reckon the company has strengths that that price does not suggest. It owns a host of well-known and long-established food brands such as Twinings and Ryvita. Such brands give the company pricing power, something that can help it maintain profit margins.
Despite its name, ABF is not just a food business. It also owns the discount clothes retailer Primark. Its success in the British Isles has set a template that ABF is hoping will translate into new regions as it continues expanding in a variety of international markets.
But given those strengths, why has the FTSE 100 share fallen so much?
A trading statement last week painted a picture of a business moving sideways, with revenues in the past sixteen weeks falling 2.2% (excluding exchange rate moves, they did grow – but only by 0.5%).
The UK and Ireland continue to have difficult market conditions. In the period under review, the agricultural division of ABF saw demand for compound feed continue to be soft both in China and the UK. I see a strong risk that will continue to be the case in the first half of this year.
Taking the long-term approach to investing
To me, though, those risks look like part of the ups and downs of running a diversified multinational business like ABF.
I take a long-term approach to investing. Over the long run, I think the value of ABF’s brands and business is not fully captured in the FTSE 100 company’s share price at the moment.
So I see it as a share that investors should consider right now.
