FTSE 100 stocks are still dirt cheap and I’m buying more in March

FTSE 100 stocks have been doing well lately, with the index recently hitting a record high of 8,000. Does this make them too expensive to buy today?

Some investors seem to think so, as the index has stalled and declined since breaking through the barrier. However, I would argue this is due to something happening elsewhere, rather than a problem with the index itself.

I’m looking for cheap stocks

Global investors have been surprised by the thought that the US Federal Reserve will push interest rates higher than expected and stay there longer. We may have to wait for the fabled “pivot”, when the Fed starts cutting instead of hiking. That thought was enough to spark a recent rally.

If investors have stopped buying FTSE 100 shares because they think they are too expensive, I think they are wrong. According to conventional metrics, they are nothing, according to the figures provided by the investment platform Bestinvest.

Managing director Jason Hollands said the FTSE 100 might be at its peak, but this did not tell the story of valuations. A better measure is the relationship between stock price and expected profits, and by this metric the index is fixed “really cheap”.

The FTSE 100 is currently trading at just 10.7 times forecast earnings. This is lower than the long-term average price-to-earnings ratio (P/E), which is closer to 16 times.

It is even lower when measured against the rest of the world, which trades at 15.7 times earnings, Hollands said. That’s a 32% discount, that is “widest in decades”.

Many investors underestimate the FTSE 100 because they think it is facing the same problems as the UK economy. But this is not a domestic index, but an international index, with listed companies generating almost 80% of their profits from outside the UK. It has more exposure to the US and Asia than the troubled islands.

It is also a Chinese market

The FTSE 100 was boosted by China’s post-Covid reopening, as the UK’s big-cap stocks returned 13% of their combined gains in China.

The big attraction of the FTSE 100 is the generous dividend income it offers investors. The current dividend yield is 4.0% a year, the highest among major markets and compared to 2.3% in global equities. It’s also at a handy premium to the current 3.4% yield on 10-year gilts.

Hollands shared my view on the composition of the UK market sector which is interesting in today’s uncertain world, given the high weighting of commodities and energy, as well as defensive sectors like consumer staples and healthcare.

When the economy is struggling, consumers won’t stop popping tablets or buying bleach, toothpaste, soap, beer, and cigarettes.

I’m on the lookout for FTSE 100 shares, while Avoiding anything that climbs too fast in the recent rally, just to be safe. Some of the top stocks are still trading at single digit P/E, incl Barclays, BT Group, Glencore, the worldand Rio Tinto, and that’s where I started my search. I will buy another one in March.