Up 24% in a year, is the FTSE 100 starting to look overvalued?

A collection of large, well-established, and mature businesses. Put like that, the FTSE 100 might not sound like it has much of a recipe for growth.

But the blue-chip index’s performance over the past year belies that impression.

In just one year, it has moved up by 24%. That means that it now stands 66% above where it was five years ago.

Is the FTSE 100 getting ahead of itself?

But while the FTSE 100 has moved up by almost a quarter over the past year, does that make sense?

It is a markedly better performance than the US S&P 500, which has moved up 15% in 12 months.

That US index still trades on a higher price-to-earnings ratio than the FTSE 100. But as it has a greater collection of high-growth companies in its ranks, I think that makes sense.

Given the generally lacklustre economic performance of the UK economy over the past year, one possible explanation for the booming FTSE 100 is bargain hunting. Its valuation has been – and continues to be – lower than its key US counterpart.

With investors becoming increasingly nervous about US economic policy apparently being made on the hoof, they have been casting around for safe havens – or bargains. That has helped attract some money into the FTSE 100.

But the UK index and its US equivalent are different things. Each needs to be valued on its own merits, as I see it – not in relative terms.

At its current price, I do not think the FTSE 100 is necessarily overvalued — but I do not see it as a bargain.

Looking for individual opportunities

That does not particularly bother me as an investor, because I do not plan to buy any FTSE 100 tracker funds in the near future.

What I have been doing, though, is continuing to invest in individual members of the index. While the index overall does not look cheap to me, some shares within it do.

For example, today (23 February) has seen the share price of JD Sports (LSE: JD) move up, after the sports retailer announced a share buyback.

But despite that, the share price is down 1% over the past year – and has more than halved in the past five years. Given the performance of the FTSE 100 during that period, that is a woeful showing.

JD Sports has invested heavily in growth, both by opening new shops and also buying up whole chains in overseas markets. While that has added revenue, the impact on profitability has so far been harder to determine.

Time will tell whether it was money well spent. The share price performance suggests the market sees an ongoing risk that it was not.

But ultimately I reckon the sports retail market will reward scale. The company has strong brands, a good relationship with its key supplier Nike, a loyal customer base, and proven business model.

I am concerned that any strong economic pullback could hurt demand for pricey trainers. However, I see the share as attractively valued and continue to hold it.

The post Up 24% in a year, is the FTSE 100 starting to look overvalued? appeared first on The Motley Fool UK.

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C Ruane has positions in JD Sports Fashion. The Motley Fool UK has recommended Nike. 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.

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