Recently, we’ve seen the tech-heavy NASDAQ fall, while the FTSE 100 has risen. Such a statement, of course, hides the fact that US markets have trounced UK markets over a longer period and especially in 2020. Nevertheless, I’d be very tempted as a UK private investor to buy cheap FTSE 100 stocks right now and hold them for at least the next four years.
Inflation concerns have heightened
One of the reasons why is that value shares tend to perform better during any period of inflation. Experts had been warning of inflation earlier in the year and it seems to be becoming a reality now. This has had an impact on US tech stocks in particular, hence the underperformance of the NASDAQ.
I expect these inflationary concerns will continue throughout this year, which is why I’ll tweak my portfolio to take that into account. I’ll also look to buy shares at a reasonable cost and which can grow in the future. In other words, that means quality companies.
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Focus on price and quality
How do I spot quality companies at a reasonable price? There are a few metrics that are key. The first is the return on capital employed. This is an important quality metric and I want to see it above 15.
The second is operating margin, which I want to be either high or improving. And the third is the ability to grow revenues consistently. The rate of revenue growth depends on the industry and company size, but consistency is usually key and for the rate to be better than that achieved by competitors.
When it comes to price, I want to see a P/E ideally below 15, but for a very-high-quality company with strong earnings, a P/E of 20-25 may also be fine. That’s especially so if high earnings mean the P/E is forecast to come down.
Cheap FTSE 100 stocks
I think Benjamin Graham, the inspiration for legendary investor Warren Buffett, was correct to say valuation and a margin of safety are very important.
So I’ll focus on cheap FTSE 100 stocks to boost my investment portfolio. There’s the added bonus that many of these shares have the potential to be boosted by the Covid recovery given that some, such as the banks, are linked to the UK economy. The economy is expected to do well later this year.
Which shares might fit the bill?
I hold a few already that I think meet these criteria, such as Diageo, Reckitt Benckiser and Persimmon.
There are plenty of other shares I need to research further too. Informa, Lloyds, BP and easyJet all have the potential to bounce back this year, I feel. These are potentially the type of cheap FTSE 100 stocks I’d add to my portfolio now that they’ve been knocked by Covid and can be bought at a lower price. I think they all have long-term potential and could be added to my portfolio to hold at least to 2025.
