With trading heading towards a close on the final day of November, what an amazing month it’s been. First, Joe Biden’s US election win gave stocks an early lift. Then news of three highly effective Covid-19 vaccines launched share prices into the stratosphere. As I write, the FTSE 100 index has soared by 765 points (13.7%) in November — a record monthly return. Likewise, US stocks have been buoyant this month, with the S&P 500 index leaping by over 350 points (10.8%). Yet the Footsie has shed 1,200 points in 2020, leaving it down almost a sixth (15.9%). That’s why I believe there are still cheap shares hiding in plain sight in the index.
Value investing still works
After exaggerated reports of its death, value investing came roaring back in November. As investors switched from high-priced, fast-growing tech stocks into economically sensitive sectors, cheap shares in banks, energy companies, and other old-economy industries had a bumper month. Jeremy Grantham, co-founder of asset management giant GMO, said a very powerful line this month. He warned, “The one reality you can never change is that a higher-priced asset will always produce a lower return than a lower-priced asset”. I agree, which is why I buy cheap shares rather than popular stocks. After all, the higher the price you pay, the lower your future returns will be. That’s why I’ll be a value investor for life.
Cheap shares: L&G looks good to me
Until they bounced back hard this month, Legal & General (LSE: LGEN) shares were having a rotten 2020. Before Covid-19 crashed markets, shares in the widely admired life assurer and asset manager were doing well. At their 52-week peak, they hit 324.7p on 13 December last year. Three months later, during the spring market meltdown, they crashed by 57.5% to a bargain 138p on 19 March.
After bouncing back until early June, these cheap shares crumbled again. At 184.5p on 29 October, I said L&G stock was a compelling buy for value investors. So it proved to be. Today, as I write, L&G’s share price is 255.7p, up more than 71p (38.6%) since 29 October. That’s an excellent return in just 31 days, but I expect more from this great British business and its cheap shares.
I’d keep buying into this quality company
Although it’s been a terrible year for the global economy, L&G has survived much worse, including two world wars and the Spanish Flu pandemic of 1918. That’s because this venerable British institution’s pedigree stretches all the way back to 1836. Today, L&G has powerful positions in UK protection products and savings, managing over £1trn of assets for more than 10 million customers worldwide. That’s a good spread of risk — and L&G’s fortress-like balance sheet is packed with a range of quality assets.
Today, L&G shares are still fairly cheap, but not as ridiculously low-priced as they were in, say, March and October. They trade on a price-to-earnings ratio of around 12.5 and an earnings yield of 8%. Also, they offer a very enticing dividend yield of 6.9% a year, more than double the 3.2% on offer from the wider FTSE 100. That’s why I’d buy this quality stock today, ideally inside an ISA, to enjoy decades of delicious tax-free dividends and capital gains!
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Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2020