At first glance, shares on the London exchange might not look that cheap. The FTSE 100 has hit a series of new all-time highs this year.
However, I still think a lot of FTSE shares are cheap. In fact, we might look back on the current market as a great buying opportunity, years from now.
Hunting for value
As a small private investor, I could easily “buy the index” if I wanted, by buying shares in a tracker fund such as Vanguard FTSE 100.
That would expose me to the good, the bad, and the ugly of the large company index’s performance. By contrast, I could – and do – choose individual FTSE shares that I think offer me great value, rather than buying the index.
Here’s how I try to spot great shares to buy
Looking at it that way, I think there are some real bargains on offer right now.
Investment, though, is about pricing the unknown. What looks like a real bargain today can turn out to be a value trap down the line.
So, I stick to areas I feel comfortable that I understand. Specifically, I look for businesses operating in those fields that have a competitive advantage I think can last.
Then, I start to dig into how attractive the shares are financially. For example, how much debt is on the balance sheet? How attractive is the share valuation?
An example of one share I’d buy
Let me illustrate with a real-world example.
The FTSE 100 firm Diageo (LSE: DGE) is now 25% cheaper per share than it was five years ago. But during that time, the Guinness brewer has grown its dividend annually. In fact, it has increased the shareholder payout each year for over three decades, making it what is known as a Dividend Aristocrat.
Diageo has had some difficulties lately, including weaker demand in Latin America. I see a risk that could be the canary in the coal mine, as cash-strapped consumers worldwide decide to spend less on their preferred tipple.
Over time, though, the strength of the company’s brands and especially their uniqueness should help keep demand high, I reckon. There are many stouts and porters, but there is only one Guinness (albeit it comes in different versions, as any pub bore will attest). Guinness’s quality accreditation programme includes checking 17 aspects of how pubs store and serve Guinness.
All J D Wetherspoon pubs have that accreditation and in May, Spoons’ chairman Tim Martin told the City, “The gods of fashion have smiled upon Guinness, previously consumed by blokes my age, but now widely adopted by younger generations.”
Looking to the long term
If I had spare cash to invest today, I would happily add Diageo to my portfolio.
The share price is down and the FTSE 100 company now trades on a price-to-earnings ratio of 18.
For a high-quality, blue-chip business like Diageo, I think that offers fair value to a long-term investor such as myself.
This post was originally published on Motley Fool
