There are lots of FTSE 100 shares that look overpriced to me right now, from Spirax Group to Tesco. Other investors seem to disagree and are buying at the current price. That is what makes a market. At the right price, I would be happy to own both shares, but for now I will just watch and wait.
That does not necessarily mean, though, that all FTSE 100 shares are overvalued. In fact, I reckon some are undervalued right now.
That could present investors with an opportunity to buy and hold shares in high-quality businesses in coming years – and hopefully build wealth. Time could be of the essence, as what looks like a cheap price today won’t necessarily be here tomorrow!
Here’s why some shares look cheap
I mentioned Spirax above. I regard it as a solid business, but despite a 44% fall in its share price over the past five years, it still trades on a price-to-earnings (P/E) ratio of 22.
Remember, my aim is to buy shares in great companies at attractive prices. Spirax only meets one of those two criteria for me at its current share price.
But other FTSE 100 shares have seen their prices beaten down – despite still being what I believe are great businesses. This is where I think the opportunity to try and build long-term wealth lies.
Sometimes, a big price drop can be justified, for example because a company faces more competition or its profitability is falling.
But – crucially — the market is not always right. Sometimes a share falls because of fears that turn out to be either unjustified or at least overdone from a long-term perspective.
On the hunt for bargains
As an example, consider one FTSE 100 share I recently bought for my portfolio: packaging distributor Bunzl (LSE: BNZL).
Its share price has fallen 30% so far this year.
The companies in the UK index are keenly watched and analysed, so that sort of fall does not typically happen without some specific triggers.
In Bunzl’s case, a profit warning in April helps explain the rout. First-quarter profit was below expectations. Weak performance in North America and Continental Europe are ongoing risks to profits, as well as turnover.
Sometimes a profit warning leads to a share price fall, before further warnings lead to even more drops down the line. No matter how cheap a share may look, it can always get cheaper.
Looking to the long term
That said, while Bunzl is an expert in wrapping things up, it hardly looks like a basket case to me yet in business terms. It has substantial international reach and a large customer base. Its business model and ability to grow (especially through acquisitions) have been proven over several decades.
So, although revenue and net profit both fell last year, I am hopeful that this is a temporary blip not the start of a long-term permanent commercial decline. As I see it, businesses will keep needing packaging – and Bunzl remains well-positioned to supply it.
Its P/E ratio of 16 looks relatively cheap to me for what I regard as a high-quality business with substantial long-term growth prospects.
