Should we buy cheap FTSE 100 shares now, before it’s too late?

17/06/2024

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'

So, FTSE 100 shares aren’t as well valued as their S&P 500 counterparts. They’re too cheap, people say, always undervalued.

But you know what? I reckon that’s great news for UK private investors.

Buying cheaper domestic shares than our US counterparts, and enjoying years of better dividend yields? Doesn’t sound so bad.

Bullish investors

But we’ve been seeing improving sentiment towards the London stock market in 2024.

And I wonder, might we be only be a couple of interest rate cuts away from a new bull run for UK shares?

In the new ISA year, investing firm Hargreaves Lansdown has seen an uptick in demand from private investors.

And I want to take a look at two very different stocks from among their five most popular right now.

Cyclical bargain

Insurer Legal & General (LSE: LGEN) has been something of a start/stop 2024 favourite.

On 12 June, the board told us it “intends to return more to shareholders over 2024-27, through a combination of dividends and buybacks.”

We should see dividend growth of 5% this year, then 2% per year to 2027. The very next day, the board commenced the first share buyback under the new plan, of up to £200m.

Sound good? Well, the Legal & General share price slumped, down 10% since the start of June.

What confidence?

This tells me one thing, at least. That confidence in UK shares is still shaky.

This is a FTSE 100 stock with a forward price-to-earnings (P/E) ratio under 10, and a forecast dividend yield of 9%. And people turn up their noses at it.

To some extent, it look like UK investors are turning to high-tech and growth as the outlook brightens. We have, after all, seen a huge surge in the Rolls-Royce Holdings share price in the past year.

And Tesla is up in the mix of favourite stocks being bought by those ISA investors at Hargreaves Lansdown.

Engineering in fashion

BAE Systems (LSE: BA.) is in the top five too as we see a bit of a resurgence of UK engineering firms.

The awful conflicts around the world are boosting defence spending. And that’s got to be behind the 40% rise in the BAE share price in the past 12 months.

BAE shares are on a forecast P/E of 21, more than twice where Legal & General stands. If folks see it as a growth stock, then I’d expect it to command a higher valuation.

And the P/E would drop to 17 on 2026 forecasts, so maybe BAE is still undervalued too?

There is a dividend on offer, but it’s not up with the best income stocks having only a 2.25% yield.

Soon too late?

How does this help with my question? Will rising share prices soon mean the end of cheap buys?

No, I don’t think it ever will. The market will change focus, valuing some sectors higher and others lower at different times. And the shift away from Legal & General also makes me think there isn’t enough cash in the markets at any one time to soak up all the bargains.

But, when interest rates come down significantly, and cash and bond investments look less attractive, I think some of today’s bargains could fade.

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