Record-breaking FTSE 100 still looks cheap. It hasn’t peaked
After smashing historic highs, investor confidence in the FTSE 100 is soaring. I’d normally be inclined to think the stocks are at a premium. Not this time. I believe the main index has plenty of room for growth. So, my attention on its constituents is at an all-time high.
Cheap as chips
Yes, the FTSE 100 recently breached the 8,000 mark. Yet, it is trading at a huge discount to both US and European peers.
I find the price-to-earnings ratio useful for assessing value. It measures how long it will take a company (or index) to pay back its market value. The lower the ratio, the cheaper a company is.
The forward price-to-earnings ratio for the FTSE 100 is 10.6 times. It’s a remarkable figure compared to the valuation of international peers. In the US, the S&P 500’s price-to-earnings ratio is 29.1 times. This is 44% above its modern-era market average of 19.6 times and suggests this market is overvalued. The FTSE 100 is also cheaper than its European counterpart, the STOXX Europe 600 index. The forward price-to-earnings ratio for this index is 12.1 times.
Contrastingly, the FTSE 100’s relatively lower valuation may be down to its heavy weighting towards certain sectors. Namely oil, mining, and financial services. I think these stocks offer anaemic growth compared to the technology stocks that have driven global markets over the last decade. I also feel the Brexit-effect has depressed valuations across the index.
A high price-to-earnings ratio means that investors are willing to pay more for a stock (or index). Thus, investors may think the more tech-focused international indexes are better placed for growth than the FTSE 100. Certainly, I observe the UK’s leading index has lagged its peers on the global stage for years.
Is this the winning FTSE 100 stock?
Nevertheless, I plan to take advantage of this potential bargain opportunity. My best option is to buy individual shares within the FTSE 100 index. I am predominantly focused on the stocks I deem to carry the the best long-term value.
A prime example is natural resource company Glencore plc (LSE:GLEN). The shares currently trade on 5.3 times forward earnings. It’s very cheap. Additionally, the shares are seen as having the potential to reach 685p this year by analysts. It’s currently 517p, so it’d be quite the uplift.
I see two further plus-points. Firstly, I believe Glencore has the best commodity diversification of the majors. Secondly, commodity prices should remain well supported by higher inflation. Glencore will be a big beneficiary of this.
However, there are some clear risks to holding this FTSE 100 stock. Its recent record profits are forecast to decline over the next three years. I also foresee higher interest rates compounding an already high debt burden.
More growth in store
Overall, I observe that the tide has turned in favour of commodity-linked stocks. Contrastingly, fast-growing technology companies are less in favour. The FTSE 100’s outperformance of the broader MSCI World Index by 5.45% last year suggests this.
I don’t envisage the challenging economic environment abating. This is why commodity majors like Glencore are firmly on my watchlist. I believe the FTSE 100 will continue to benefit too due to its significant weighting to this sector.
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Henry Adefope 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 2023