The much-feared ‘October curse’ has struck again, with shares diving on both sides of the Atlantic before Halloween. This has been the worst week for the UK and US stock markets since the darkest days of March. The FTSE 100 index lost 280 points (4.8%) to close at 5,577.27 points on Friday. With the US presidential election due next Tuesday, the S&P 500 is even more volatile, down 215 points (6.2%) this week. For pessimists, this has been a grim week. But for optimistic value investors (including me), lower prices make cheap shares even more compelling buys.
Buying cheap shares has been terrible in 2020
As I watch the prices of cheap shares in great businesses descend into the depths, I wonder if I’ve gone crazy and lost the plot. After all, my strategy of buying and holding cheap shares in quality companies for the long term has lately produced unimpressive returns. Indeed, value investing has had a terrible 2020 — and that’s on top of a poor decade since the global financial crisis ended in 2009. Incredibly, value investing is enduring its worst performance period in almost 200 years, according to this recent report. This is partly due to investors embracing shares in fast-growing mega-cap US tech firms, while shunning ‘old world’ businesses such as banks, oil & gas, and tobacco companies.
A nasty year for NatWest
One week ago, I wrote about NatWest Group (LSE: NWG). Since July, this is the new name for the Royal Bank of Scotland. Alas, this change hasn’t stopped these cheap shares from tanking. On Friday, NatWest stock closed at 124.2p, up 7p (6%) on the day, but only 1.1% ahead for the week. I expected more from it this week (see below), but it may have been held back by a weak market.
Overall, it’s been a tough 2020 for NatWest shares, which have almost halved, having collapsed 48.3% in 10 months. At its 52-week high just before Christmas, NatWest stock closed at 265p on 13 December. Today, the ‘Big Four’ banks’ market value is £14.2bn, down over £16bn from its 2019 peak.
I still think NWG is a cheap FTSE 100 stock
During the Covid-19 spring panic, NatWest’s share price collapsed to 101.75p on 3 April, before rebounding to hit 137.35p on 5 June. Over the past five months, the stock has zigzagged along, before plunging to a fresh low of 90.54p on 21 September. At this point, these cheap shares were even cheaper than chips.
On Friday, NatWest released an improved set of quarterly results that beat the most optimistic analysts’ forecasts. In Q3, it booked a pre-tax profit of £355m, versus a £1.3bn loss in Q2. This was driven by provisions for loan losses, which plunged to £254m from £2.1bn in Q2. As a result, the bank’s Common Equity Tier one (CET1) ratio — a measure of financial strength — climbed to 18.2%. This leaves NatWest with £8bn of excess capital, suggests one analyst.
Today, the NatWest share price stands more than a third (37%) above its September bottom. Even so, I believe that this stock is still deep in the ‘cheap shares’ bargain bin. NatWest’s excess capital should cushion it from further losses from being the #1 lender to small businesses. And, when it restarts dividends in 2021, as it should do, NatWest’s stock should soar. That’s why I would buy these cheap shares today, ideally inside a tax-free ISA, to bank future capital gains and tasty dividends!