£5k to invest? I’d buy these cheap FTSE 100 shares today

High profitability, low costs and a great outlook put these cheap FTSE 100 shares on my buy list today, says Tom Rodgers.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Cheap FTSE 100 shares are out there if anyone is willing to do the hard graft of finding them. And with all the weakness in the stock market right now, there are some super bargains to be had.

Now, when we do our research on cheap FTSE 100 shares, we’re looking for value.

Not just bottom-of-the-rung prices, but share prices that are cheap relative to the company’s long-term future prospects. 

Value, profits, payback

One standard way of finding good value shares is to compare their P/E ratio. This takes a company’s share price and divides it by earnings per share. It’s not perfect, but it is a quick way of comparing lots of different industries all at once. The average P/E ratio across the whole FTSE 100 is 15.7. 

Any number below that denotes relatively cheap FTSE 100 shares — but it is up to us to find quality too. So we need to consider profits, how likely a company is to survive another downturn, and long-term growth as well. Let’s begin.

Permission to buy

With a P/E ratio of just 9.4 Persimmon Homes (LSE:PSN) looks to be in our sweet spot for cheap FTSE 100 shares. Net cash of £828.9m is certainly a very strong balance sheet for the UK’s largest housebuilder. 

What about the short-term outlook? Sentiment among construction firms in September 2020 was at its strongest since before the Covid outbreak, with business flying in at its fastest rate all year.

This is according to the IHS Markit Purchasing Managers’ Index for the sector. 

Analysis of the wider market is positive too. Local lockdowns have not impacted the rate of construction, while asset manager Jeffries recently rated the sectortoo cheap to ignore”. 

We see current share price weakness as presenting a great entry point for our key picks,” said Jeffries, naming Persimmon alongside Berkeley and Barratt Homes.

I’d stick with Persimmon for its profitability: the company’s return on capital employed of 22% destroys Barratt and Berkeley and is in the top five of the entire FTSE 100. High-double-digits usually means a company has a strong edge over its competitors. There’s a reason why it’s famed fund manager Terry Smith’s favourite metric. 

Future perfect

As an investor I’m very interested in the company’s forward order book. This tells me in depth what the company’s strength is likely to be.

Half-year results for the six months to 30 June 2020 showed Persimmon’s forward orders 21% ahead of last year at £2.5bn. CEO Dave Jenkinson brought back a “modest” 40p per share interim dividend on the back of this sales strength. This only represents a 1.5% dividend yield, sure. However, the City is expecting Persimmon to reinstate its full dividend of 125p per share: a healthy 5% dividend at today’s prices.

And Persimmon has not always had such cheap FTSE 100 shares. Look back to 2016 and the company’s P/E ratio was knocking on the door of 15. So I’d say now is a good time for me to buy.

Clearly, the fact that Persimmon shares have rebounded 60% since the Covid stock market crash indicates that there is optimism in the air. Glass-half-full investors are fewer and further between these days with all the threats on the horizon. 

So with five grand burning a hole in my pocket, these would be my top cheap FTSE 100 shares to buy. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

TomRodgers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

More on Investing Articles

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »