It’s been a turbulent week for many FTSE 100 shares. Most suffered at the hands of investors taking fright at unexpectedly sticky inflation data, and the Bank of England’s decision to increase the base rate.
But one person’s trash is another’s treasure. And I think there are some bargains to be found right now among the stocks of the UK’s biggest companies.
Building blocks
Persimmon (LSE:PSN) shares are currently changing hands for around £11. They were last at this level in May 2013 — over a decade ago!
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Even though it cut its dividend earlier in the year, it’s still yielding close to 5.5%.
And I can’t seen anything fundamentally wrong with the company. It has the land, people and financial resources available to build more houses.
But there are fewer buyers around due to the increased cost of mortgages. And a prolonged economic downturn could lead to a further loss of confidence in the property market.
However, I think housing is going to be a key issue at the next general election. I’d therefore expect politicians from all parties to promise new schemes to help first-time buyers get on the property ladder.
Ringing the changes
We have to go back 26 years — to July 1997 — to find when Vodafone (LSE:VOD) shares were last trading below 70p. They almost reached this level on Thursday (22 June).
The telecoms giant’s problems are different to those of Persimmon. It has lots of customers under contract providing guaranteed revenues. But its turnover and earnings have remained broadly flat over the past five years. It’s this lack of growth that’s causing investors to take fright.
Also, at 31 March, its debt was over 12 times its underlying operating profit. That said, the company has been disposing of some of its non-core assets to bring its borrowings down.
A €1bn cost-cutting programme — and a merger of its UK operations with Three — are intended to improve profitability.
But if these fail, I fear that it will cut the dividend — the present yield is 11%!
Potential upside
Both these stocks are trading well below their 10-year highs.
If they went back to these levels, a 226% return would be made, assuming an equal investment in each.
| Stock | Current share price (pence) | 10-year high share price (pence) | Potential upside (%) |
| Persimmon | 1,104 | 3,298 | 199 |
| Vodafone | 72 | 255 | 254 |
But there’s no guarantee this’ll happen.
However, both have book values in excess of their market caps. And I think they’re well positioned to benefit from an economic recovery, even if it takes a few years.
Cash is king
It’s unfortunate that I own both stocks.
But despite the current doom and gloom, I think the medium-term outlook for the UK economy is an improving one. And I reckon these shares will bounce back.
There will inevitably be some bumps along the way but the key to successful long-term investing is to remain calm. And to be confident that the stocks of quality companies will win through.
If I had some spare cash I’d be looking to buy more of these shares.
I think there’s a once-in-a-decade chance to more than turbocharge any investment that I make now. Alas, I don’t have any funds available at the moment.
And that’s a valuable lesson that I’ve learned. In future, I’m going to try and ensure that I’ll always have some cash in my portfolio, ready to take advantages of future buying opportunities like these.
