For UK shareholders, 2020 has been a tough year. As Covid-19 spread, share prices collapsed, wiping trillions of dollars from global wealth. UK shares were hit particularly hard. Even after a near-record bounce in November, the FTSE 100 index has lost over 955 points — more than an eighth (12.7%) — this year. By contrast, the US S&P 500 index is ahead by over 470 points (14.6%) in 2020. What’s going on with the Footsie and where are its cheap shares hiding?
The FTSE 100’s 42 winners
To see where the damage to the FTSE 100 was done, I analysed all 99 shares that were in the index for at least a year. This also gives me an opportunity to hunt for cheap shares.
Of these 99 shares, 42 have risen over 12 months. The highest gain was 116%, from a tech-focused investment trust. The #2 stock was up 108% (a miner of precious metals). What a year for shareholders in these two winners. A further 24 shares recorded double-digit gains ranging from 84.4% to 10.6%. The remaining 16 shares delivered single-digit rises ranging from 8.5% to 1.2%. The average gain across all 42 winners is 24.5%. But my search for cheap shares lies elsewhere.
The FTSE 100’s 57 flops
With 42 FTSE 100 shares up over 12 months, that leaves 57 losers. The lightest loss was just 0.4%, with a further 24 shares recording single-digit declines. This leaves 32 losers with double-digit price falls ranging from 10.4% to 57.9% (a well-known airline). The average fall across all 57 losers was 15.3%, versus the FTSE 100’s 9% slide over 12 months. Also, it’s clear that big declines among heavyweight fallers are responsible for most of the damage done to the FTSE 100 since 2019. This is where I look for cheap shares in quality companies.
Cheap shares: The FTSE 100’s biggest losers
These are the FTSE 100’s 10 biggest fallers over 12 months:
- Informa (Publisher & events organiser) -27.4%
- HSBC Holdings (Global mega-bank) -28.7%
- Standard Chartered (Global bank) -29.8%
- BT (Telecoms) -29.9%
- Melrose Industries (Manufacturing conglomerate) -30.1%
- Royal Dutch Shell A (Oil & gas supermajor) -36.2%
- Royal Dutch Shell B (Oil & gas supermajor) -37.8%
- Lloyds Banking Group (UK retail bank) -39.5%
- BP (Oil & gas supermajor) -42.4%
- Rolls-Royce Holdings (Aero-engine maker) -48.7%
- IAG (International airlines group) -57.9%
Against the backdrop of Covid-19, it’s easy to see why these particular stocks have been crushed in 2020. Banks are highly exposed to loan losses due to failing businesses in lockdowns. Likewise, falling demand for fossil fuels and a decline in the oil price has clobbered energy stocks. At the very bottom lie IAG and Rolls-Royce, both devastated by the dizzying collapse in air-miles flown. To be fair, I’m surprised these two stocks aren’t even lower, given that normal air traffic is unlikely to return before 2023/24. These two ‘cheap shares’ may well turn out to be value traps.
I’d buy these cheap shares for 2021
Of these nine businesses (Shell accounts for two shares), I’d consider buying the cheap shares of five firms. The five are HSBC, BT, Shell, Lloyds and BP. My reasons? I expect a big bounce from banks in 2021, being very sensitive to upswings in the economic cycle. Likewise, a return to normality should boost fuel consumption, raise oil prices, and boost Shell and BP. For years, I’ve considered BT a basket case (partly due to its colossal pension problems), but even I am warming to its shares. In short, I think a mini-portfolio of these five shares could beat the wider FTSE 100 in 2021, not least because of its market-beating dividends!