The FTSE 100’s 14% rise over the past year means it may now be more difficult to find undervalued shares. Many previously cheap stocks trade on increasingly generous valuations following an improvement in investor sentiment. Meanwhile, a number of growth shares are priced at levels which are difficult to justify.
Despite this, FTSE 100 shares such as housebuilder Persimmon (LON: PSN) and pharmaceutical company AstraZeneca (LON: AZN) could still offer capital growth potential. Their upbeat financial prospects do not appear to be reflected in share prices that have underperformed the FTSE 100 index over the past 12 months.
Persimmon’s share price has gained just 5% in the last year. This represents a nine percentage point underperformance of the FTSE 100. A key reason for its disappointing performance could be the prospect of rising interest rates that make houses less affordable. Meanwhile, the proposed end of the Help to Buy scheme, which provides a government loan to first-time buyers, in 2023 could also have affected investor sentiment in recent months.
However, modest interest rate rises may fail to end recent house price growth. After all, homeowners currently spend around 30% of their earnings on mortgage repayments, on average. This is significantly below the 46% figure recorded shortly before the global financial crisis. Furthermore, government support via the mortgage guarantee scheme, through which homebuyers require just a 5% deposit, may help to maintain high demand for new homes.
Persimmon’s share price appears to include a relatively wide margin of safety. It currently trades on a forward price-earnings ratio of around 12. With a strong balance sheet, a large land bank and the potential for continued high demand for new homes, it could be well placed to deliver stronger performance than the FTSE 100 over the coming years.
AstraZeneca’s share price has lagged the FTSE 100 by two percentage points in the past year. During that time, it has risen by around 12%. Investors appear to be uncertain about its acquisition of rare diseases specialist Alexion. Moreover, it currently trades on a price-earnings ratio of 47. This is significantly higher than many of its sector and index peers.
However, the firm’s latest quarterly update showed that it is performing well. Revenue increased by 28% in the first three quarters of the year, with it rising by an impressive 48% in the third quarter alone. Furthermore, the company’s pipeline continues to provide long-term growth potential. It has announced eight positive Phase Three results since June, while the integration of Alexion is progressing relatively well.
Despite its high valuation, AstraZeneca could offer fair value for money given its growth potential. Indeed, its bottom line is forecast to rise at an annualised rate of around 38% between the 2021 and 2023 financial years. Using expected earnings for 2023, its price-earnings ratio falls to a far more modest 18. And, with a strong pipeline of new drugs, it could offer long-term growth potential after a relatively lacklustre annual performance versus the FTSE 100.