The FTSE's Cheapest Shares In The Storm

Published in Investing on 21 May 2012

The short, sharp bear market has thrown up some big bargains.

Looking at the FTSE 100's cheapest shares on forward earnings often throws up some bargains.

As you might imagine, though, that wasn't the case over the past three months. At the end of February, I asked: "Which FTSE 100 shares have been left behind in the recent bull run?" Cue a rolling tumbleweed. I also said: "First quarter -- everyone's a winner" Again, I hold my hands up -- they're all losers over the last quarter.

The humble P/E

Looking at the price-to-earnings (P/E) ratio in isolation is a simple measure by design. In looking at the most basic of all valuation measures, we can quickly see any shares out of kilter with the market.

In my opinion, the forecast P/E has merit as a starting point for further research, or possibly as a basis mechanical trading. FTSE 100 companies are very heavily analysed. But 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.

In February, all the stocks on the short list except AstraZeneca (LSE: AZN) were up on the previous quarter. The mean average improvement in the top 10 over the first couple of months was over 13% (not including dividends) versus the FTSE 100's 5.5% improvement.

Since I ran the screen at the end of February, the average fall has been 22.3%, versus the FTSE's 11.3% drop. Here's how February's top 10 have performed

CompanyOpening price 27 FebClosing price 18 May% performance*
FTSE 100 Index5,935.15,267.6-11.3%
Kazakhmys (LSE: KAZ)1,163p693.5p-39%
Aviva (LSE: AV)373.8p264.9p-25%
BP (LSE: BP)496.2p391.95p-20%
Rio Tinto (LSE: RIO)3,670.5p2,788p-22.5%
BAE Systems (LSE: BA)316.9p271.8p-14%
Eurasian Natural Resources Corp. (LSE: ENRC)739p457.9p-38%
Royal Dutch Shell (LSE: RDSB)2,353p2,044p-12%
BHP Billiton (LSE: BLT)2,073p1,704.5p-16%
Barclays (LSE: BARC)247.6p176.1p-29%

*Including dividends paid or owed since 27 Feb.

What's interesting about this table is those companies that had the lowest forward P/Es three months ago have generally fallen the most. And almost all fared worse than the FTSE 100 index. Miners, financials (including insurers) and oil companies have borne the brunt of the storm.

Running the same screen now gives us the following top dozen:

CompanyClosing share price 18 MayForecast P/E 2013*
Eurasian Natural Resources Corp.457.9p5.83
Rio Tinto2,788p6.13
Man Group (LSE EMG)75.3p6.28
Glencore (LSE: GLEN)345.35p6.3
RSA Insurance (LSE: RSA)98.7p6.4
Anglo American (LSE: AAL)2,019p6.49
BAE Systems271.8p6.61
Xstrata (LSE: XTA)914.7p6.66
Royal Dutch Shell2,044p6.7

*Figures based on consensus broker forecasts for 2013 earnings per share (Morningstar).

And if we decided to make it a baker's dozen, we'd find February's number one Kazakhmys down to number 13, despite its big fall. This, of course, is explained by brokers' falling forecasts.


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So, putting BAE Systems to one side for the moment, it's all about financials, miners and oil as fears over future earnings in these sectors weigh heaviest in light of the eurozone worries.

The top 12's average P/E has either improved or deteriorated depending on your investment philosophy, from 7.8 to 6 despite brokers' earnings forecasts generally falling across the board. These are fearful times indeed.

So what will the next quarter bring? If you track the history of this 'experiment', you'll see how boomeranging sentiment causes huge gyrations. My best guess is that the next quarter will see sentiment shift for the better, but I'll try and let the numbers do the talking.

Finally, let me finish by adding that more share ideas can be found within this Motley Fool report: "8 Shares Held By Britain's Super Investor". The guide reviews the investing approach and portfolio of City dividend legend Neil Woodford and is free to download today.

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Further investment opportunities:

> David owns shares in Aviva, BP, AstraZeneca, Barclays, RSA Insurance & Royal Dutch Shell.

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4spiel 22 May 2012 , 12:36pm

Fascinating to read but just because a share might be 'cheaper' does it mean that it has more value now? There seems to be a problem that some good companies have undervalued shares and there are some companmies have overvalued shares because they have been over-ramped up.RSA / Unilever . some have high yield but an uncertain product outlook.What is 5-6% anyway you can get more yield in SREI .And BLND goes unmentioned.

Rotation96 22 May 2012 , 1:20pm

@4spiel - I think the author leaves it open for you to decide whether the cheaper shares above have created more value, always DYOR (I personally think it is a rather strange point of view that Unilever's product outlook is uncertain). The whole name of the game is to find shares that are good companies that are currently undervalued.

SREI is small with a market cap of about £120m, this article is about the FTSE 100. There are lots of small companies with >6% yields (some even > the 10% that SREI offers) but this is not about them.

BLND is unmentioned because the price has not dropped significantly in the last couple of months, which, again, is the subject of the article

jobbones 22 May 2012 , 1:30pm

my sense of timing must be impeccable, my pension fund is in transit to a SIPP, I hope the bearish market lasts a bit longer!

4spiel 22 May 2012 , 2:26pm

Rotation96 Re -product uncertainty -that referred to AZN but those letters didn't come through and could not edit the post- sorry. Yes RSA undervalued I am sure but Unilever I believe over ramped up -it was ok at 1700p . Otherwise fair comment ! but maybe still not out of context to have suggested that what has currently dropped most and most recently should not eclipse better value in some that have dropped mediumterm but show more strength in results.-like BLND

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