With November almost over, what a month it’s been for UK shareholders. News of Joe Biden’s US election victory gave cheap shares an early boost. Then news of three effective Covid-19 vaccines lit the fuse and shares skyrocketed like fireworks. So far in November, the FTSE 100 index has soared by 790 points since Halloween, up over 14% in four weeks in a record-breaking comeback. It’s a similar tale across the Atlantic, with the S&P 500, NASDAQ and Dow Jones Industrial Index all setting record highs in the past week.
The FTSE 100 has had a rough year
Although this month has seen a record-breaking rebound, the FTSE 100 has had a poor 2020. It’s down nearly 16%) this calendar year, even after November’s fireworks. With few big tech stocks and heavy weightings in banks, oil & gas, and miners, the Footsie has fallen out of favour among global investors. Nevertheless, it’s been an amazing month for value investors, as the cheap shares soared in November’s relief rally.
In fact, this month’s sudden switch from growth stocks into value shares was the ‘most violent’ on record, according to analysts. The arrival and distribution of Covid-19 vaccines in 2021 is expected to reignite global growth and boost corporate earnings. Even so, US growth stocks today trade at an average of 38 times earnings, according to Citigroup. Meanwhile, value stocks trade at an average of 17 times earnings. To me, this suggests a strong potential for higher returns over the next decade from cheap shares than from racy, popular stocks.
These cheap shares are up 32%, but still a bargain
Since the global financial crisis of 2007-09, growth/momentum investing has thrashed value investing, which has endured its worst slump in nearly 200 years. However, as the economy recovers, I see cheap shares in quality companies returning to favour, thanks to their low valuations and high dividends. For example, I’ve long argued that shares in well-known investment manager M&G (LSE: MNG) were too low-priced. Indeed, M&G’s stock was repeatedly among the cheapest FTSE 100 shares this year.
M&G was part of the giant Prudential, until it was spun off from its parent in October 2019. Now it’s a FTSE 100 company in its own right. Before the Covid-19 market crash, M&G shares hit an all-time high of 251.4p on 19 February. By 18 March, they had crashed to 84.12p, down two-thirds in a month. Yikes. By mid-August, these cheap shares had recovered to above 182p, but then nosedived again, hitting 146.65p on 30 October.
The FTSE 100 may be up over 14% this month, but M&G shares have more than doubled this bounce. On Friday, they closed at 193.45p, up 46.8p (31.9%) since Halloween. Even after gaining nearly a third in four weeks, I still see these cheap shares as worth buying. Today, M&G is worth a mere £5bn — an appetising snack easily gobbled up by a vastly larger rival. After all, its shares trade on a price-to-earnings ratio of around 4.6 and an earnings yield of 20.5%.
Lastly, M&G’s greatest attraction must be its delicious dividend yield of 6.2% a year, almost double the FTSE 100’s 3.2%. That’s why I’d happily buy these cheap shares today, ideally inside an ISA. Then I could enjoy years of tax-free dividends and future capital gains!