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The FTSE 100 is more than 33% undervalued! Time to start buying bargains?

photo of Union Jack flags bunting in local street party
Image source: Getty Images

Throughout the last few years, the FTSE 100 has proven to be a remarkable safe haven from volatility for investors. With other indexes like the FTSE 250 and S&P 500 crashing by double digits in the 2022 correction, the UK’s flagship index remained robust and even eked out a profit.

Yet, despite the economic landscape improving in some ways, British shares haven’t seen much of a recovery. In fact, as of the start of 2024, the average price-to-earnings (P/E) ratio of FTSE 100 shares stood at just 10.8. By comparison, the index’s average over the last decade is closer to 16.3. And it’s also significantly behind both European and American indexes.

Assuming this discrepancy in price will eventually be resolved, it suggests these UK shares are, on average, 33.7% undervalued. And as every investor knows, buying quality stocks at dirt cheap prices is one of the best strategies for building wealth.

Why is the FTSE 100 lagging

There are many factors influencing the level of a benchmark index. But when comparing the FTSE 100 to something like the S&P 500, which currently has a P/E closer to 20, a trend emerges. The primary driving force of growth across indexes worldwide seems to originate from the technology sector. And the UK has a significant shortage of stocks in this space.

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Out of the 100 businesses inside of the index, just three operate within the tech sector. They are Sage Group, Auto Trader, and Rightmove. And they’re not exactly the cutting-edge software enterprises like those across the pond. With the majority of constituents weighted towards more defensive sectors like healthcare, commodities, and financials, growth is struggling to be found.

What are the cheapest stocks to buy?

Filtering these businesses by their P/E ratio reveals that Barclays (LSE:BARC) appears to be the greatest bargain right now. At an earnings multiple of just 4.3, the banking stock is trading significantly lower than its historical average as well as that of its parent index.

That would certainly explain why the average stock price forecast among analysts currently sits at 215p. For reference, the current share price is closer to 143p, so the stock may be 50% undervalued. And management developing a habit of consistently beating analyst expectations, the temptation to snatch up shares is rising.

Of course, forecasts may be wrong. And even being a £22bn bank comes with risks. This is especially true considering interest rates are expected to be cut in the near term, perhaps hitting profit margins.

But as shown by the lacklustre performance of the index, Barclays isn’t the only potential bargain to consider capitalising on. And for those who spot the biggest discounts, strong returns could be seen in the coming years.

The post The FTSE 100 is more than 33% undervalued! Time to start buying bargains? appeared first on The Motley Fool UK.

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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays Plc. 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 2024