Whether you want to earn extra money to pay school fees or that big family vacation next year, or are saving for some other reason, investing is a great way to build your wealth.
Some investors already know where they want to invest their money, others may be looking for inspiration. If you’re looking for ways to get started, here are three popular ways to scour the market for ideas.
It’s important to do your own research. Just because something is cheap or offers a high return doesn’t automatically mean it’s a good investment.
Low PE
Source: AJ Bell, SharePad. PE = Price to Earnings Ratio. Based on the stock price as of August 23, 2024 and next year’s forecast earnings per share, which is yet to be announced.
One of the most commonly used valuation metrics in the world of investing is comparing a company’s earnings to its share price. This is called the price-to-earnings ratio and is often abbreviated to PE.
The P/E ratio is calculated by dividing the current share price by the forecast earnings per share. You can find consensus analyst forecasts online.
Generally, if a stock has a P/E ratio of 20 or more, it is either highly valued due to certain qualities of the company or overpriced and expensive. A P/E ratio between 10 and 20 can be a fair value, although benchmark valuations can vary between different sectors.
A ratio below 10 puts the stock in the cheap range. It’s important to distinguish between companies that are valued low because of short-term problems or an unpopular industry, and others that might be cheap because there’s something fundamentally wrong with the company.
These are just rules of thumb. Many investors rely on other metrics in addition to the P/E ratio to get a more comprehensive picture of whether a stock is cheap, fairly valued or expensive.
Wizz Air has one of the lowest P/E ratios among stocks in the UK’s FTSE 350 index. Its share price has fallen by more than 40% since the beginning of the year due to general market concerns about the airline sector, leading to a stock downgrade.
Travellers have waited until the last minute to book tickets across much of the airline sector, prompting operators to slash prices to get the seats and, in the process, lowering profit expectations.
Investors must decide whether Wizz Air shares, which trade at 5.8 times next year’s expected earnings, have now priced in all the bad news and are cheap, or whether they will fall further.
Low PEG
Source: AJ Bell, SharePad. PEG = Price to Earnings Growth Ratio. Based on the stock price as of August 23, 2024 and next year’s projected earnings per share/EPS growth rate, which is yet to be announced.
Some investors like to consider a company’s earnings growth potential when deciding to buy a stock. One relevant valuation method is the price-earnings-growth ratio (PEG).
You first calculate the P/E ratio (stock price divided by projected earnings per share) and then divide that number by the projected earnings growth rate.
A low PEG means you will pay a low price for future earnings growth, and a value of 1 or below is considered cheap. Some market commentators believe the optimal time to invest in value is when the PEG ratio is between 0.6 and 0.8. This is subjective and not a golden rule to follow.
Burberry trades at a PEG of 0.3, meaning shares are cheap compared to the earnings growth analysts expect. The company is going through a bad patch as sales in Asia were not as good as expected, leading to a change in management.
Shares are trading at a 14-year low, which is a sign to the market that the company has lost its way. Investors who go against the grain may see this as an opportunity to buy into a well-known company cheaply. That would require faith that Burberry can bounce back.
High yield
Source: AJ Bell, SharePad. Based on share price as of August 23, 2024 and next year’s projected dividend payments to be announced.
One of the main incentives for buying stocks is dividend income. Not every company pays a dividend, but many do so regularly, for example every three or six months. Therefore, the dividend yield of a stock can be of great interest to investors when analyzing the market for investment opportunities.
The concept of a dividend yield is similar to the interest rate you get on cash in a savings account. Your bank might offer an annual interest rate of 3.5%, meaning you get 3.5% interest on your savings each year. In this example, you would get £35 in interest per year on £1,000 worth of savings.
A share with the same payout as this bank account would yield 3.5%, meaning you would receive £35 in cash each year for every £1,000 of shares you hold.
The difference between stocks and savings accounts is that they find companies that increase their dividends every year and often also offer a significantly higher yield than the best interest rate on cash in the bank.
At the end of August 2024, it was possible to open savings accounts with up to 5.2% interest, according to data from MoneySavingExpert. In contrast, 63 stocks in the FTSE 350 offered an even higher dividend yield, based on calculations by SharePad using the share price at the time of writing and the market’s consensus forecast for dividends to be paid next year.
It is important to note that dividend payments are not guaranteed and companies can reduce or eliminate dividends at any time. This does happen from time to time and is an important risk for investors to consider.
ITV is one of the stocks with a higher expected dividend yield than the best savings accounts. Its yield is 6.2%, while its P/E ratio is low at 8.8 and its PEG ratio is low at 1. The company makes its money from advertising, subscriptions to streaming platforms and licensing its content to third parties, creating a diverse revenue stream that helps fund dividends as well as creating new TV productions and supporting investments in its technology platforms.
Disclaimer: These articles are for informational purposes only and do not constitute personal recommendations or advice. Past performance is not an indicator of future performance and some investments must be held for the long term. Forecasts are not a reliable indicator of future performance.
