November proved to be a huge relief for UK shareholders, as cheap shares rebounded on good news. First, Joe Biden beat Donald Trump to become US president #46. Second, news of three efficacious Covid-19 vaccines sent share prices soaring skywards. In the best month since January 1989 (+14.4%), the FTSE 100 index surged by almost 690 points in November. This leap of an eighth (12.4%) added £180bn to the FTSE 100’s market capitalisation. December has also got off to a good start. As I write, the Footsie has added more than 115 points (1.9%) in an early Christmas gift for investors. Though global stocks have soared since Halloween, I still believe you can buy cheap shares in quality companies today.
The FTSE 100 is not expensive
Although UK shares have just had a great month, they’ve also suffered a grim year. For the record, the FTSE 100 has lost 1,160 points this calendar year, a dive of 15.4%. 2020 is shaping up to be the index’s worst year since 2008 (during the global financial crisis). Furthermore, the Footsie has gone nowhere this millennium and is actually lower today than it was at the turn of the century. In fact, the index first exceeded today’s levels all the way back in the spring of 1999, during the dotcom boom. That’s why I think that the index may have much further to go — and that there are too many cheap shares hiding in plain sight.
Earlier, I quickly reviewed the performance of FTSE 100 members over the past month. I found that of 99 shares that have been in the index for at least a year, 76 gained in value over the past month. The top gainer (a well-known airline) was up 69.3%. The average gain across all 76 winners was close to a fifth (19.7%). However, 23 shares missed this broad-based rally, with the worst falling by a tenth (9.9%). I suspect my search for cheap shares would work better in the bottom half of this list.
I see these cheap shares gaining in 2021
For example, at #62 in the table, registering a modest gain of 6.9% in the past month, lie the cheap shares of British American Tobacco (LSE: BATS). Sin stock BATS is a FTSE 100 heavyweight. At its current share price of 2,670p, this 118-year-old British institution has a market value of £61.4bn. Thanks to its colossal revenues, earnings, and cash flows, BATS now pays the second-largest FTSE 100 dividend by size. Indeed, tobacco dividends provide a decent proportion of the income sought by income-focused funds. Even so, these cheap shares have had a disappointing 2020.
At its 52-week high in mid-January, the BATS share price topped £35. Eleven months later, BATS shares are more than £8 — almost a quarter (23.9%) — cheaper. However, cigarette sales have actually climbed in some countries during this global recession. This divergence between the BATS share price and the company’s business outlook suggests that its stock is a buy. For the record, BATS shares trade on a price-to-earnings ratio of 9.8 and an earnings yield of 10.2%. In addition, the dividend yield of 7.9% a year should prove irresistible to income-seekers (but not ethical investors!). That’s why I’d happily buy these cheap shares today, ideally inside an ISA, to enjoy bumper tax-free dividends and future capital gains.
Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.