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After the FTSE 100 index of main blue-chip shares hit a brand new all-time excessive final month, it might appear that prime UK shares might now be overpriced.
In actual fact, I believe there are doubtlessly some nice bargains to be discovered this February!
What a excessive index does and doesn’t inform us
The FTSE 100 is made up of the 100 London-listed corporations with the most important market capitalisations.
Over the a long time, as declining corporations slip out and rising ones take their place, I might count on the index to maintain shifting broadly upwards, although there could possibly be substantial volatility alongside the way in which.
A technique for me to attempt to benefit from that might be to spend money on a fund that tracks the FTSE 100 index.
That may imply I might make investments without having to do lots of analysis into particular person shares myself. My portfolio ought additionally to learn from the sturdy efficiency of some index members.
The flipside can be true, although: I might be saddled with the poor efficiency of the weaker FTSE 100 shares.
That helps clarify why I choose to purchase particular person shares quite than spend money on an index tracker.
As for what a report excessive index stage tells us as buyers? For my part, not essentially a lot of actionable use.
What the index is at now and the way it compares to the previous shouldn’t be helpful for me. What I wish to know – or at the very least take a view on – is whether or not it’s undervalued or overvalued in comparison with what I believe is its seemingly future worth.
Shopping for particular person shares
To make that judgement on the index stage strikes me as troublesome.
Positive, I might contemplate its price-to-earnings ratio as a proxy. However I wish to spend money on what I do know – and I have no idea all 100 of the highest FTSE companies nicely sufficient to take a view on whether or not their present valuations are affordable or not.
However I can do this within the case of particular person shares.
Luckily, regardless of the index worth, I believe there are nonetheless some potential bargains even amongst well-known FTSE 100 corporations.
One share I’ve been shopping for
For instance, contemplate my shareholding in retailer JD Sports activities (LSE: JD).
I already owned the FTSE 100 agency in my portfolio, however have been profiting from a latest share worth fall (JD has tumbled 12% to this point this 12 months alone) so as to add extra.
May the JD worth hold falling from right here?
I believe it could. A number of revenue warnings prior to now 12 months – together with one final month – have shaken Metropolis confidence within the funding case. A weak economic system might harm discretionary shopper spending on issues like pricy trainers.
Nonetheless, as a long-term investor that doesn’t hassle me.
I believe the JD Sports activities share worth, which has halved prior to now 5 years, now seems like a attainable cut price for a confirmed and extremely profitably enterprise I count on to continue to grow in years to come back.
With a powerful model, increasing worldwide store footprint, giant digital operation, and enthusiastic buyer base, JD Sports activities looks like an excellent FTSE 100 enterprise to me – promoting for a knockdown worth.
