Which FTSE 100 shares have been left behind in the recent bull run?
The FTSE 100's cheapest shares on forward earnings often throws up some bargains.
It's a simple measure by design -- in looking at the most basic of all valuation measures, the price/earnings ratio (P/E), we can quickly see any shares out of kilter with the market.
The forecast P/E has merit as a starting point for further research, or maybe as a basis mechanical trading if this is your thing. These companies are analysed to the nth degree, and earnings are the single main valuation metric. So it's interesting to watch how the stocks that are cheapest at face value move over time as macro sentiment shifts.
If you track the history of this simplistic experiment and had timed your purchases well, you could have picked up a few bargains over the past year, more or less across the board. But this is a big "if". It's easy to talk about bargains in hindsight.
First quarter -- everyone's a winner
When I last ran this experiment at the start of the year -- Man Group (LSE: EMG) had come straight in to the number one position from nowhere. At the time, the share price was 123p and the prospective P/E was an unfeasibly low 5.6.
Since then, Man Group has put on 9% and the consensus broker forecast earnings per share for the current year have slipped from around 22p to 14.6p, so it's slipped out of the top 10. At one point, the shares went as low as 104.5p.
But at the same time, every share from January's top ten it has put on a substantial spurt over the last couple of months, with the exception of AstraZeneca.
AstraZeneca has been the class dunce due to its less than sparkling final results, fears over future earnings and prospects for growth. This still looks more like an opportunity than a threat to me, but I've been wrong so far. The shares have gone ex-dividend during the quarter to the tune of 123.6p, so remain roughly unchanged.
The mean average improvement in the top ten from the start of January is over 13.2% (not including dividends) versus the FTSE 100's 5.5% improvement. By far the biggest gainer has been Barclays with a staggeringly good 35% over less than three months, followed by Foolish favourite Aviva, which has managed a "mere" 23.2%! Not a bad quarter for the financials then.
So here's how things stand today:
What is particularly notable compared with January's figures is how the average top ten P/E has either improved or deteriorated depending on your investment philosophy, from 6.6 to 7.8. The financials have had a good quarter, but the components remain essentially unchanged.
This compares to the FTSE's overall average P/E of 10.6 for the coming year. Times are clearly less fearful than they were at the start of the year. Has the world really changed that much? Of course not. Either Mr. Market was too fearful at the turn of the year, or he's too complacent now. I'd say it was more the former than the latter.
The miners and big oilers have moved up the charts due not to their poor performances, but their relative performance to the financials. Interestingly, sitting just outside the list is Tesco (LSE: TSCO) following its fall from grace with an expected P/E of 9.3.
So what will the next quarter bring? Will Greece and the Eurozone crisis, or worries over Iran, for example, cause the top ten P/Es to fall back to fearful levels, or are we in a sustainably good bull market for the foreseeable? Either way, I'll try and let the numbers do the talking.
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> David owns shares in Aviva, BP, AstraZeneca, Barclays & Tesco. The Motley Fool owns shares in BHP, AstraZeneca and Tesco.