The coronavirus pandemic has caused unprecedented damage to economies around the world. Supply chains have been disrupted and unemployment has risen sharply. In response, the UK Government has enacted a stimulus package in an attempt to prop up the economy in what is expected to be the biggest recession in living memory. But amid the gloomy outlook for the nation’s finances, I see at least one positive. Many quality FTSE 100 shares are trading on cheap valuations as a result of the sell-off in equities.
Cheap FTSE 100 shares
Right across the FTSE 100 index, many companies are trading substantially below their average historic valuations. To me, this suggests there is significant value to be had. What’s more, despite the dismal outlook for the economy, a lot of these companies have taken the necessary steps to ensure their survival and continued prosperity once the pandemic subsides. In fact, some stocks have even thrived throughout the coronavirus period. I expect many could continue to do so even throughout a UK recession.
With that in mind, now may be an ideal time to buy FTSE 100 shares and hold them for the long term. Pick wisely and the bargain shares you invest in today could deliver attractive returns that help to finance your early retirement!
Ones to watch
On my watchlist are a handful of companies that look oversold to me, and therefore undervalued.
For example, oil and gas “supermajor” Royal Dutch Shell has seen its share price fall by around 41% since the start of 2020. The stock has taken a beating thanks to collapsing oil prices and the pandemic. However, I think Shell is well positioned to withstand a prolonged negative impact on business. This is primarily thanks to its mammoth cash reserves and healthy liquidity. Once the world economy recovers, demand for oil should, in theory, return to pre-pandemic levels. With such a dirt-cheap valuation (P/E: 7.9), I find it hard not to classify the company’s shares as undervalued.
After falling by 16% in the depths of the sell-off, GlaxoSmithKline shares now sit level with their pre-crash valuation. With group sales rising 19% and profits up by 14%, full-year guidance remains unchanged. As a defensive stock, I reckon GSK shares will fare well regardless of the extent of the UK recession. Earnings have thus far proven resilient, allowing the company to announce a 19p dividend for the quarter. With healthcare giants such as GSK set to play an ever-important role in an ageing population, I think a P/E ratio of 13.4 is more than justified.
Finally, shares in the leading British supermarket Tesco, which trade at a P/E ratio of 12.6, look like great value to me. The food retailer’s dominant market position (30% market share) and healthy margins are impressive. What’s more, of all the supermarkets listed in the index, I think Tesco has the strongest growth potential. This can be seen in its expanding online services and acquisition of the wholesale operator Booker. A dividend yield of 4% further sweetens the deal.
Get rich and retire early
In my view, all three of these quality FTSE 100 shares have the potential to deliver attractive returns over the long term through a combination of share price appreciation and dividend payments. As such, they could prove to be indispensable in your path to achieving financial freedom.
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Matthew Dumigan own shares in Royal Dutch Shell. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended Tesco. 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.