FTSE 100 shares are on a recovery trend after all the panic and chaos of 2020. So to improve my wealth in 2021 I’m laser focused on buying quality and riding the upwards shift.
I’ve handpicked two FTSE 100 shares I think will improve the most this year. At the moment, both can be had at attractive valuations, which gives me a better chance of returning outsized gains for my portfolio.
How I pick FTSE 100 shares
Successful value investors like Warren Buffett always make the most of short-term uncertainty and focus on long-term quality. That’s why today I’ll use common metrics like price-to-earnings and price-to-book to value these FTSE 100 shares. This way I can objectively pick out my best investing options.
Investors will probably already know about the price-to-earnings (P/E) ratio. Any share trading below the FTSE 100 average of 17.2 could be considered relatively cheap. The price-to-book (P/B) ratio is less often cited but equally important. It’s a measure of a company’s market value compared to its ‘book’ value. Any FTSE 100 shares under 1 are considered to be undervalued, but some investors will look at companies with P/B ratios under 3.
Barclays (LSE: BARC) is currently at the top of my watchlist. Today its shares are trading at a P/E ratio of just 10.6, well below the average for the UK index. I see this as deeply undervalued. The company’s P/B ratio? Just 0.3. That’s well below the fair value of its assets.
And while Barclays reported heavy losses in the first half of 2020, its performance has rebounded back into profit since.
CEO Matt Hammerstein has initiated a cost-cutting drive too. Reducing office costs and moving more staff to remote working will further relieve pressure on the Barclays balance sheet.
And the Bank of England has told British banks they can reinstate dividends and start buying back shares. I think these two points will help these FTSE 100 shares gain strongly in 2021.
Vodafone (LSE: VOD) is one of those FTSE 100 shares whose price has been beaten down in the last 12 months. But a 6.1% dividend yield remains attractive. With a rolling P/E ratio of 13 and a P/B ratio of 0.6, these shares look cheap to me. And the long-term value case at the mobile and broadband giant is starting to stack up again.
Analysts expect that over the next two years, Vodafone will improve growth and trim its debt. So if I buy now I could take advantage of what I see as a share price recovery.
Vodafone has also commercialised its mobile mast operation, Vantage Towers. This promises reduced debt alongside secure long-term income streams. It also gives Vodafone a strong position in the growing 5G infrastructure market.
City analysts at Berenberg recently upgraded their price target on Vodafone too. Comparing the FTSE 100 shares with fellow giant BT, they said: “Vodafone is the higher growth story, which we would be more comfortable holding for a multi-year period.”
My 2021 outlook
FTSE 100 shares usually offer investors the best ratio of stable growth-to-income. That narrative has been roundly tested throughout the pandemic as many reduced or cut their dividend payouts entirely. But now that a way out of the Covid nightmare is on the horizon, I see investments like these FTSE 100 shares coming back strongly.
TomRodgers has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. 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.