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As Warren Buffett once said, “It is much better to buy a great company at a fair price than to buy a great company at a great price.”. although FTSE 100 index Recently hit an all-time high, still full of great companies on the cheap, and some UK stocks could be bargains.
For all the talk about Britain’s main index being disappointing, it has been quite the opposite over the past year. The index is up about 25% since December 2020 and has performed admirably. Investors flocked to consumer staples, financials, and commodities — sectors where the index has a significant weight — during tough times.
| section | % of the FTSE 100 |
|---|---|
| Consumer Goods | 17.9% |
| Finance | 17.8% |
| Material | 13.4% |
| industries | 12.2% |
| health care | 11.7% |
| energy | 9.5% |
| Consumer Dictionary | 6.9% |
| Communications | 4.3% |
| Real estate | 1.4% |
| technology | 1.4% |
Bad times make strong companies shine. Over the past decade, the FTSE 100’s lack of exposure to technology and growth names has had investors flocking to US stocks in search of better prospects, thus painting a pessimistic picture for UK stocks. However, it also led to a real opportunity to take advantage of undervalued stocks.
Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.
Sir John Templeton
All in blue chips
The British economy could soon plunge into recession. But this shouldn’t affect the address pointer too much. That’s because only a quarter of its revenue comes from domestic sources, and the bulk of it comes from emerging markets and the US. As such, this presents a very lucrative opportunity to invest in FTSE 100 shares.
China’s emergence from its epidemiological recession could help lubricate the wheels, too. This is particularly the case with commodity stocks such as miners and oil explorers. With interest rates expected to remain elevated throughout 2023, the financial and consumer goods sector should perform well.
Most lucrative, British stocks are currently trading at relatively cheap valuation multiples. With an average price-to-earnings ratio (P/E) of 14, and a forward P/E of 11, the index’s major multiples are still very low historically. Moreover, the average FTSE dividend yield is around 4%, which is very attractive. And with returns expected to increase for shareholders over the coming years, there is no better time to buy than today.
However, not all FTSE 100 stocks are equal or boast bargains. In fact, some are cringing at the overpricing, given the uptick seen in the UK since October. However, I do have three favorites that are worth mentioning.
The first is IAG. The airline group continues to ride a strong travel industry tailwind and is on track to return to full-year profitability. And with load factors still lagging behind pre-pandemic levels, there is still a lot of positive potential for travel inventory.
The second is housing construction, Taylor Wimby (LSE: TW) shares of the developer slowly rebounded from the bottom. The housing market may not be back to its highs any time soon, but the FTSE 100’s strong financials and huge dividend yield (7.5%) represent a lucrative investment opportunity for long-term growth while earning passive income.
finally, Lloyd’s (LSE: LLOY) is a great stock to take advantage of the current rate hike cycle. The Bank is expected to continue to generate high levels of income from its high interest rate assets. This could result in shareholders receiving greater dividends while earnings continue to grow.
