Today you’ll get a list of the cheapest stocks in the FTSE 100 according to their earnings.
I use a free online screener for this.
The screen itself is based on the defensive large cap strategy found in the free value investing ebook which returned 16.53% against 12.64% against the FTSE 100 during 2013 by purchasing a basket of stocks on 31 December 2012 and dumping them exactly one year later.
It’s the same screen that got me into Exxon Mobil months before Warren Buffet did when I applied it to the US stock market.
Last week we looked at US large cap stock Netflix (NFLX) and 33 metrics I use to value large caps. We’ll follow on from there and find a list of the cheapest stocks in the FTSE 100 using the same screener.
Social media is crammed full of chatter that essentially says that the stock market is overvalued and finding a lot of cheap stocks has become more difficult.
The screens I use to find cheap stocks such as the large cap screen have been slowly returning fewer and fewer potentially undervalued stocks and so I tend to agree that the market is overheating to an extent. But I never allow the valuation level of the market at any given time to stop me from buying undervalued stocks if there is value to be found.
For one thing these observations are useless as a predictive tool over the short to medium term since nobody knows what the stock market is going to do next. Over the long term it is safe to say that returns over the next decade from stocks are likely to be terrible.
But even then that should not bother you if you’re a value investor since you can manage your portfolios by increasing or decreasing how much of your portfolio is cash and how much is invested in stocks.
Here are the screen ‘rules’:
Here is a list of the cheapest stocks on the FTSE 100
Fresnillo: Ah yes. A mining company. To be honest I would have been pretty amazed if a mining company had not made it onto the list since the mining sector has had a terrible time of it lately due to the pressure on commodities prices.
Lets have a look at Fresnillo’s earnings:
Earnings have certainly slowed over the past two years which has been reflected in the share price since it has essential gone sideways over the same time period.
Morrison: Unlike Fresnillo, this UK supermarket is selling near to it’s 2008 lows of 220p with today’s price of 236p. Earnings can be described as barely registering growth as the following table shows:
At least earnings are positive and have managed to grow even through this tough business environment. I’d like to see earnings breaching 30p.
Old Mutual: One of two financial companies from the list Old Mutual hit 36p a share in March 2009 but closed at 193p last Friday (10th January) so it is way off it’s lows. Another concern is that Old Mutual registered an earnings deficit in fiscal year 2009:
Earnings have climbed since but have only just surpassed pre-financial crisis levels.
Rolls Royce: Like Old Mutual, Rolls Royce is trading way above it’s financial crisis lows (260p) closing last Friday (10th January) at 1239p. Earnings per share are erratic with a deficit in 2008 of -73.63
This is my least favourite stock from the list.
RSA Insurance: RSA Insurance is already trading below it’s financial crisis low of 113p and has been since the third quarter of 2011. Last Friday’s close (10th January) was 98p.
No earnings deficit but earnings have been in a slow and steady decline over the last five years. The all time low share price is 68p so I’d probably get interested at around this price.
Sainsburys: Like Morrison, this UK supermarket chain’s earnings have gone sideways for the previous four years almost doubling from financial crisis earnings.
Unlike Morrison, Sainsburys is not trading near it’s financial crisis lows which makes it less appealing than Morrison
All earnings data is from morningstar.co.uk
Why Screening For Stocks Matters
Note how there are only 6 stocks on the list. This is significant because it tells me that the market is overheating.
Because this time last year this same screen returned a diversified group of 16 stocks.
Sure the fact that I’ve used a PE ratio of 12 rather than 15 or higher will inevitably return less stocks because such low valuations are rarer in today’s inflated market.
But this is the same set of criteria I used as last year. Nothing has changed, except the market value of all stocks.
Also 6 stocks is not sufficient diversification to initiate a defensive portfolio composed entirely of UK stocks. The alternative will mean a little ‘reshuffling’ and could include:
- Combining two or more strategies into one eg a portfolio of large and small cap stocks
- Expanding your universe to global markets
- Going straight to cash or their alternatives such as treasuries
- A combination of the above
Diversification: preferably between 16 – 25 stocks in many different sectors
Using different screens for stocks saves a ton of time and using this strategy will generate investing ideas from lower risk large cap stocks. A diligent investor can apply a set of metrics to delve deeper into these stocks.
Also check out Premium Membership for more value investing tips.
- Testing Benjamin Graham; Final Results 2013
- With Stocks At Record Highs, What’s Still Cheap?: This Week In Shares And Stock Markets
- How To Research Undervalued Stocks
- Free Value Investing Ebook