LONDON -- Looking at the FTSE 100's (INDEX: ^FTSE ) cheapest shares on forward earnings often throws up some bargains.
As you might imagine, though, that wasn't the case over the past three months. At the end of February, I asked: "Which FTSE 100 shares have been left behind in the recent bull run?" Cue rolling tumbleweed.
I also said: "First quarter -- everyone's a winner." Again, I hold my hands up; they're all losers over the last quarter.
The humble P/E
Looking at the price-to-earnings ratio in isolation is a simple measure by design. In looking at the most basic of all valuation measures, we can quickly see any shares out of kilter with the market. In my opinion, the forecast P/E has merit as a starting point for further research, or possibly as a basis for mechanical trading. FTSE 100 companies are very heavily analyzed, but earnings are the main valuation metric, so it's interesting to watch how the stocks that are cheapest at face value move as macro sentiment shifts.
In February, all the stocks on the short list except AstraZeneca (NYSE: AZN ) were up on the previous quarter. The average improvement in the top 10 over the first couple of months was more than 13% (not including dividends), versus the FTSE 100's 5.5% improvement.
Since I ran the screen at the end of February, the average fall has been 22.3%, versus the FTSE's 11.3% drop. Here's how February's top 10 have performed.
Opening Price, Feb. 27 (pence)
Closing Price, May 18 (pence)
|FTSE 100 Index||N/A||N/A||(11.3%)|
|Aviva (NYSE: AV )||373.8||264.9||(25%)|
|BP (NYSE: BP )||496.2||391.95||(20%)|
|Rio Tinto (NYSE: RIO )||3,670.5||2,788||(22.5%)|
|Eurasian Natural Resources||739||457.9||(38%)|
|Royal Dutch Shell||2,353||2,044||(12%)|
*Including dividends paid or owed since Feb. 27.
What's interesting about this table is that the companies that had the lowest forward P/Es three months ago have generally fallen the most. And almost all fared worse than the FTSE 100 index. Miners, financials (including insurers), and oil companies have borne the brunt of the storm.
Running the same screen now gives us the following top dozen:
Closing Price, May 18
Forecast P/E 2013*
|Eurasian Natural Resources||457.9||5.83|
|Royal Dutch Shell||2,044||6.7|
Source: Morningstar. *Figures based on consensus broker forecasts for 2013 earnings per share.
And if we decided to make it a baker's dozen, we'd find February's No. 1, Kazakhmys, down to No. 13, despite its big fall. This, of course, is explained by brokers' falling forecasts.
So, putting BAE Systems to one side for the moment, it's all about financials, miners, and oil as fears over future earnings in these sectors weigh heaviest amidst eurozone worries. The top 12's average P/E has either improved or deteriorated -- depending on your investment philosophy -- from 7.8 to 6, despite brokers' earnings forecasts generally falling across the board. These are fearful times indeed.
So what will the next quarter bring? If you track the history of this experiment, you'll see how boomeranging sentiment causes huge gyrations. My best guess is that the next quarter will see sentiment shift for the better, but I'll try to let the numbers do the talking.
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