Last week, the FTSE 100 hit a new record high. Behavioural psychology tells us that people tend to avoid buying when prices are high, believing they aren’t getting good value. To some extent, I agree. But that’s why I think now is the perfect time for me to target undervalued stocks before the crowd rushes in.
Trying to beat the crowd
If you think about it, the logical step for investors to take after seeing the index breaking to new highs is to look for individual stocks that offer better value. Over the coming year, I’d expect this category of stocks to rally, as people cycle out of expensive shares and put that money to work in companies with lower valuation metrics.
If I can buy now, it could enable me to beat the inflows that could occur in the coming months. Of course, I don’t know exactly which FTSE 100 stocks will be flavour of the month. But I can spread my risk around a basket of companies with below-average price-to-earnings (P/E) ratios. In theory, all could eventually trade at a fairer value over time.
The risk to this strategy is that investors might decide to stick to buying high-growth stocks, even at lofty valuations. If people are optimistic about the company’s outlook, there’s no reason why something overvalued can’t become even more highly valued in the short run.
A suggestion to ponder
One example that I’m considering right now is Barclays (LSE:BARC). Despite contributing to the FTSE 100 rally with a 57% jump in the past year, the banking stock has a P/E ratio of 9.03. This is below the benchmark fair value of 10 I use, and well below the 16.6 figure of the FTSE 100 average.
The bank is doing well as part of a major cost-cutting programme. This should yield over £1bn of annual savings by next year. The simplified business lines are helping to increase efficiency. Further, the trading desks have handled market volatility well, boosting profits from this division.
Looking forward, I think the stock could rise further as the valuation increases. It’s pushing for more AI and digital banking initiatives, which should help progress, with income investors likely being attracted to the recent increases in the dividend per share amounts.
The bank is partly reliant on the success of the UK economy, which is a risk. The April GDP print showing a 0.3% contraction could spark some fears about the health of the economy going forward.
Even with this, the stock could see more people buying it as they look for good value picks in the index right now. Therefore, I’m strongly thinking about buying.
