I’m piling up cheap FTSE shares while I can

It’s been a busy few days in stock markets around the world. Some of the major stocks have seen significant declines. flagship FTSE 100 the index has lost 5% in a few days, although it is still 5% higher than a year and five years ago.

So does the fall offer a buying opportunity?

Laser focus on quality

The answer is yes and no. Yes – I am definitely looking at some buying opportunities for my portfolio. But no, I don’t plan just to pile into the FTSE 100 shares as a group. However, I want to focus on just a few that I think offer exceptional quality but at an attractive price.

100 different stories

An index like the FTSE 100 is exactly what its name suggests, a collection of 100 stocks. Indices such as the FTSE 250 and FTSE 350 contain a wider selection of stocks.

So just because the FTSE index is down doesn’t mean every individual stock within it is down. What a cheap stock is is a judgment based on the current price and how it compares to what I think it should be based on the company’s long-term earning power. It is not the same as comparing it with the previous stock price.

Take the members of the FTSE 100 Barclays precedent. It has fallen 12% in the past year. What does it mean to be cheap, given a strong brand and proven profitability? Indefinite. After all, Barclays’ prospects now look different than they did a year ago. Last year’s after-tax earnings fell 15%. A tight economy could make it harder for banks to turn a profit in the coming years.

Strong business prospects

However, if I see a share of what I think is an outstanding FTSE company selling at an attractive price, I usually consider adding it to my portfolio.

At the moment, I think some stocks meet that definition.

Take JD Sports for example. I already own shares in this FTSE 100 retailer. But now the market capitalization is around £9bn. That seems cheap to me for a company that expects to make pre-tax profit and outstanding goods of more than £1 billion this year and has plans to open hundreds of new stores a year. One risk that I see is that the capital expenditure from the expansion could affect the profit margins.

Another example is a conglomerate DCC. I started buying shares this year after they fell in price (they fell 24% last year).

With a price-to-earnings ratio of 13 and a dividend yield of 4.1%, I see the company as a good value. It is very generative of cash and has a large customer base installed so I can help it to work well in the future. Debt is a risk though. Funding acquisitions add to DCC’s debt, which can be leveraged.

I bought FTSE shares

Companies like JD Sports and DCC are not interesting to me simply because their shares look cheap. However, they are interesting because I think the company has bright financial prospects for the coming year. The fact that the stock is now cheap has given me an opportunity to buy. And I caught it!