As I write, London Stock Exchange trading is about to close for November. And what a memorable month it’s been, as cheap shares soared in response to good news after good news. First, Joe Biden defeated Donald Trump to win the US presidential election, giving US stocks and UK shares an early bounce. Then news of effective Covid-19 vaccines from Pfizer/BioNTech, Moderna, and AstraZeneca/Oxford sent share prices surging.
These positive developments set November up to be a record month for UK shares. As I write, the FTSE 100 has leapt by 720 points (12.9%) in November, its best monthly performance since its inception in 1984. Likewise, US stocks have staged a big comeback, with the S&P 500 up 335 points (10.2%) since Halloween. However, though it’s not been a great year for the Footsie, I see deep value hidden in the FTSE’s 100 cheap shares.
The FTSE 100 has a year to forget
As I said, the Footsie hasn’t had a great 2020 — in fact, it’s been a pretty grim year for the index. It’s dropped close to 1,250 points in 2020, which is a loss of a sixth (16.5%) this calendar year. That’s one of the worst yearly performances in the index’s 36-year history. The only two years worse than 2020 this millennium were 2008 (-31.3%, global financial crisis) and 2002 (-24.5%, dotcom bust and 9/11). Despite this November surge, many investors will look back on 2020 with regret, I imagine.
Of course, not all shares have fallen in 2020 and the range of returns across the FTSE 100 is widely distributed. As I revealed earlier today, 39 FTSE 100 shares have risen over the past 12 months. The remainder have all lost value, with the average decline among the losers being a painful 17.8%. Nevertheless, I see these losing stocks — especially the worst of these laggards — as a happy hunting ground for cheap shares set for recovery in 2021.
I’d buy GSK’s cheap shares today
One of my favourite cheap shares has had a grim 2020. In fact, down at #81, it’s in the bottom 20 of FTSE 100 stocks by one-year price performance. That company is global pharma giant GlaxoSmithKline (LSE: GSK). I’ve owned GSK shares for most of the past 30 years. Also, two close relatives have worked for the group, so I know this great British business very well. Alas, GSK has disappointed shareholders, with its share price down more than a fifth (21.9%) over the past 12 months.
I’m surprised that GSK has been one of the dogs of the FTSE 100 in 2020. After all, it has leading franchises in vaccines, immunology, oncology (cancer), HIV/AIDS, and respiratory treatments. While healthcare stocks globally have boomed this year, GSK wasn’t invited to the party. In fact, its share price crashed from 1,779p at the end of 2019 to close at 1,370p today. That’s a fall of over £4 a share (23%). Having peaked at 1,857p on 24 January, collapsed in the spring and then rebounded, GSK’s price has been in decline since mid-May.
Nevertheless, as a value investor, I’d happily keep buying GSK’s cheap shares today. In historical terms, they really are cheap, trading on a price-to-earnings ratio of below 11 and an earnings yield of 9.1%. Even better, the steady 80p-a-share yearly cash dividend equates to a hefty annual dividend yield above 5.8%. That’s almost twice the FTSE 100’s yield of 3.2%. Hence, I will continue to reinvest my GSK dividends into more shares while they remain cheap. Buying more shares now at low prices is exactly what I need to do to retire rich with a passive income!
Cliffdarcy owns shares of GlaxoSmithKline. The Motley Fool UK has recommended GlaxoSmithKline. 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.