Just over one year ago, the FTSE 100 was hitting fresh highs of more than 7,700. The blue-chip share index was trading at a pricey 22 times earnings, with a poorly-covered dividend yield of 3.8%.
What a difference a year makes. The FTSE is now hovering around 6,900, but a big boost in earnings from a handful of large companies such as Royal Dutch Shell (LON:RDSa) has helped to transform the index’s valuation.
As I write, the FTSE 100 trades on a price/earnings ratio of 11.5. The dividend yield of 4.5% is covered a comfortable 1.9 times by the collective earnings of the companies in the index.
If you’re invested in a FTSE 100 index tracker, this valuation suggests to me that now could be a good time to top up. However, for investors who are willing to buy individual stocks, I think better opportunities are available within the FTSE 100.
How did I do in 2018? In my FTSE 100 strategy piece last year, I noted that defensive stocks like Unilever (LON:ULVR), Reckitt Benckiser, Diageo (LON:DGE) and British American Tobacco (LON:BATS) looked expensive. I was (mostly) right. BAT shares fell by 49% last year, while Reckitt ended the year down by 11%.
Unilever and Diageo managed small gains, but on average the share prices of these four firms fell by about 14% in 2018.
My results were more mixed when it came to selecting potential winners. Among the stocks I singled out from my own portfolio, Centrica (LON:CNA) beat the market but still ended the year lower. Asia-focused bank Standard Chartered (LON:STAN) performed much worse, falling by nearly 25%.
Although some of my shares fell sharply last year, my dividend income continued to grow. This helped me to stay calm and avoid panic selling when the market started falling in the autumn.
Stocks I’m avoiding The carnage we’re seeing in the retail sector shows no sign of coming to an end. So at this time I’m still avoiding commercial property companies such as British Land and Landsec, which own a lot of retail property. I expect to find value here at some point, but I don’t think there’s any rush to buy just yet.
New FTSE 100 member Ocado (LON:OCDO) continues to look overpriced to me, despite a raft of new contracts for its automated warehouses. I’m also avoiding J Sainsbury (OTC:JSAIY), which looks much weaker to me than rivals Tesco (LON:TSCO) and Wm Morrison Supermarkets.
What I’m buying My aim is to continue focusing on value and quality. I’m looking for above-average dividend yields that are supported by strong cash flow and a modest valuation.
In my view, last year’s sell-off has created some attractive buying opportunities. I remain keen on insurance stocks and recently bought more Aviva (LON:AV) and Direct Line Insurance Group. I’ve also added more Imperial Brands (LON:IMB) and moved into telecoms with BT.
Among the companies on my shortlist for the final slot in my portfolio are engineering conglomerate Smiths and packaging group Mondi (LON:MNDI). I also believe there’s good value on offer at ITV (LON:ITV) and advertising giant WPP (LON:WPP).
Of course, all of this is only my personal opinion. But whatever you choose, I wish you a safe and prosperous 2019.
Roland Head owns shares of Aviva, BT GROUP PLC ORD 5P, Centrica, Direct Line Insurance, Imperial Brands, and Standard Chartered. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended British Land Co, DS Smith, Imperial Brands, ITV, Landsec, Standard Chartered, and Tesco. 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.