6 Cheap Blue Chips For The Next Bull Market

Published in Company Comment on 12 July 2010

1982 heralded the start of an 18-year bull market. Could history repeat itself?

Remember a few years back when it seemed like the entire stock market was overpriced? Well, the tide has certainly turned, and you can now pick up some bargains on even the biggest, most solid shares in the market.

What a recovery may bring

The lack of strength in the economic recovery has economists and investors alike nervous about the future. But when it comes to individual shares, you'll find a huge disparity between the pessimism that traders have in bidding share prices down versus the optimistic views that analysts have about their prospects for future earnings.

In particular, looking at the valuations for some of the biggest shares in the FTSE 100, you'll find a bunch of shares that currently trade for less than 10 times the earnings estimates that analysts have for 2011. Here's a selection:

Prudential (LSE: PRU)537p5.6
BHP Billiton (LSE: BLT)1,853p7.1
BAE Systems (LSE: BA)322p7.3
Royal Dutch Shell (LSE: RDSB)1,677p7.0
Astrazeneca (LSE: AZN)3,222p8.0
Next (LSE: NXT)2,058p9.2

Those values have some salivating over shares right now, with some drawing comparisons to 1982, the beginning of a huge 18-year bull market. And especially with base interest rates at such low levels, the incentive to take on risk by moving money into the stock market is high right now.

A look back at 1982

But before you go pull your Human League albums out of the closet and start working on a retro hair style, you should remind yourself about some key traits of the 1982 investing environment. 

At between seven and eight times forward earnings, shares were definitely bargain-priced during that dicey period almost three decades ago. But a lot of things were much different than they are now.

The most striking difference is where interest rates are now versus then. Back then, interest rates topped 14%. Now, deflation appears to be the potential menace, as the longest-term gilts cost the government just over 4% in interest right now.

In addition, investors have a lot more choices in where to put their money now. Back then, apart from locally traded shares and plain vanilla unit trusts, most investors didn't have much access to different types of investments. 

Now, with the explosion in ETFs and other more complicated investment vehicles, it's a lot easier to diversify into specific sectors or regions. With investor attention focused well beyond solely the UK stock market, there's no guarantee that UK shares will benefit from a long-term recovery as much as they did in the 1980s and 1990s.

Do you believe in the bull?

Perhaps the biggest concern, though, is how much you trust forward earnings estimates. Analysts are notorious for overestimating growth, especially well into the future. As for recessions, they are not even on the radar of the vast majority of analysts.

Even so, with the gloomy mood in the stock market, the valuations on offer for some of the biggest companies in the UK already seem to price in worse case scenarios. And if the economy simply bumps along and we don't experience a double-dip recession, you'd think the above companies should be in for a re-rating at some stage in the not too distant future. Wouldn't you?

Don't hold back

For shares to be a good value right now makes plenty of sense. Investors are still shell-shocked from the plummeting market in 2008 and early 2009, and while they were more than willing to ride the rally as long as they could, any whiff of losses reawakens bad memories.

Even if things are a lot different now than they were in 1982, it's still worth taking a close look at blue chip shares. If you'd like to read up on three of our favourite high-yield shares, click here to receive our latest free report.

Although valuations are still somewhat higher than they were back in the early 80s, not being able to get a guaranteed double-digit return on gilts and bonds, as you could back then, could mean it's worth taking on more risk right now. If you can afford it of course!

More on the economy and the markets:

> If you're in the market for buying shares, consider opening an online broker account with The Motley Fool's Share Dealing Service. You can buy and sell shares in real time for a flat rate of just £10. Click here to open an account for free today.

> A version of this article, written by Dan Caplinger, was originally published on Fool.com. Bruce Jackson, who has an interest in Shell and AstraZeneca, has updated it.

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The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

Fingered 12 Jul 2010 , 12:11pm

The so-called recovery has well and truly brown twigged Brucie.

JOHORA 12 Jul 2010 , 1:03pm

While there's a lot of truth in what Fingered says - it is not just the UK that the outcome will be measured on.
As the recent World Cup demonstrated - no matter how much navel gazing goes on in this country - there are other [better] players out there.

Netherwood 12 Jul 2010 , 1:47pm

How does a bull market in equities occur with historically low interest rates? Answer it doesn't. At some point interest rates will have to rise to the historical norm at some point. Warren Buffett caried out some research some years ago contrasting two 18 year periods of stock market inactivity compared with a bull market. The bull market coincided with falling interest rates

jasonjarvisgbr 12 Jul 2010 , 2:12pm

Looking backwards will take you there.

RockderktheGreat 13 Jul 2010 , 3:54am

Yeah. All the fundamentals are there. Overpopulation, a shrinking tax base, infinite-growth based use-it-all-up-now resource management, un-repayable debts, a planet that hates us...Hell yes. lets all pile into the stock market!

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