As we inch closer to a Covid-19 vaccine every day, the FTSE 100 index rises more. At yesterday’s close, the index reached a five-month high of 6,421. While this is excellent news for our existing stock market investments, I think it does pose a small challenge for future ones.
The challenge is finding cheap UK shares to buy. As the bulls return to stock markets, share prices have risen in the past days, making shares more expensive.
FTSE 100 stocks to buy now
However, I think there are still plenty of buying opportunities for the long-term investor. Some high-quality stocks have seen a share price dip as investors’ risk appetites increase and they rush into stocks that offer higher rewards. As a result, this gives a chance to buy high-performing FTSE 100 stocks whose price had run-up quite a bit in the bear market. Classic defensives are one example of this kind of share.
You might argue that even after the sharp drop in share price, these stocks don’t look particularly cheap on a relative basis. It’s true. The earnings ratio of some defensives are still quite high. But I don’t think a high earnings ratio necessarily means the stock is expensive. I think we need to look at these stocks from the perspective of where they would be two to three years down the line.
If the company is likely to perform well in the future, then the likelihood of its share price rising is also higher, irrespective of where it is now. The earnings ratio shows the premium investors place on these stocks. Two examples I’ve talked about in the past are the FTSE 100 pharmaceuticals provider AstraZeneca and online grocer Ocado. Their share prices still look elevated because of their long-term prospects. There are others like them too.
Among the stocks whose share prices have weakened in November is the FTSE 100 hygienist and pest-control provider Rentokil Initial (LSE: RTO). Its share price is down almost 10% from the highs it touched earlier in the month. The company that said its “business performed very well in Q3” and added that “we currently expect the outcome for the full year to be at least in line with expectations”. This update came in less than a month ago, when it reported a 9.8% increase in revenue.
Admittedly, some of this is due to the pick up in disinfection services, which could subside as the world, hopefully, goes back to more normal times in 2021. Its acquisitions may also invite investor caution. On the whole, though, I think there’s much to look forward to. Despite an earnings ratio of over 40 times, I doubt if there will be a sustained fall in RTO’s share price. There may only be dips like the present one, so I’m thinking of buying this one now.
The post The FTSE 100 index hits a 5-month high! Can I still buy cheap UK shares? appeared first on The Motley Fool UK.
Manika Premsingh owns shares of AstraZeneca, Ocado Group, and Rentokil Initial. 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.
Motley Fool UK 2020