Say it quietly, but we are in the midst of a bull market. Since the beginning of the year, the FTSE 100 has risen 6.6%. Of its members, 19 stocks are ahead by more than 10%. Only 14 blue-chip shares are in negative territory so far in 2013.
Fortunately, some cheap shares do remain. I have found five companies that I believe that the market is undervaluing.
2013 P/E (forecast)
2013 yield (%, forecast)
Market cap (£m)
Legal & General (LSE: LGEN)
WM Morrison Supermarkets (LSE: MRW)
Royal Bank of Scotland (LSE: RBS)
SSE (LSE: SSE)
Vodafone (LSE: VOD)
Legal & General
Few companies in the FTSE 100 are better positioned to take advantage of current market conditions than Legal & General.
As one of the largest providers of investment products to the public, Legal and General thrives in strong equity markets. In the last three months, shares in Legal and General have increased 12.6% as the FTSE 100 has risen 8.1%. If the bull market continues, I expect that this gap will widen further.
Not only is the business well positioned, I also believe that the shares are cheap. Today, Legal and General shares trade on a 2012 price-to-earnings (P/E) ratio of 10.8 and a 2013 P/E of 10. That seems too cheap for a company that is expected to report two years of strong earnings growth.
WM Morrison Supermarkets (Morrisons)
Shares in supermarket chain Morrisons are down 13.2% in the last year. That's some reduction.
Some commentators have bemoaned the fact that Morrisons does not have a convenience or online offering to compete with Sainsbury's or Tesco. However, it is the loss of market share to rivals that worries me most.
Still, Morrison's is expected to grow both its earnings per share (EPS) and dividend for 2013 and 2014. This makes the shares cheap compared to rivals Tesco and Sainsbury.
As shops disappear from the UK's high streets, this may be the perfect time for Morrison's to move in with a convenience offering. I also expect that it could set up an online offering for much less than it cost Tesco and Sainsbury's.
Although Vodafone shares have rallied recently, they remain attractive.
The market appears to be reassessing the value of Vodafone's 45% stake in Verizon Wireless. This has pushed the shares up 9% so far in 2013.
Vodafone looks a classic each-way bet investment. Even if the shares do not continue to rise, there remains a considerable dividend yield. There are two big reasons I expect Vodafone shares to continue their rise in 2013. First, the shares are cheap. Second, the company is just part of the way into a huge buyback of its own shares.
Even if I am wrong on both counts, the shares are expected to yield 5.8% for 2013. That's well ahead of the market average. Even better, the yield is forecast to continue increasing into 2014.
Royal Bank of Scotland (RBS)
I've gone for Royal Bank of Scotland here but could just as easily have picked Barclays or Lloyds Banking Group. All three are very cheap right now.
Don't be put off by the big rises RBS has enjoyed in the last six months -- I still see plenty of upside from here.
RBS will likely issue its 2012 final results in the third week of February. This year's reporting season for the banks could be a pivotal moment in their recovery. Provided eurozone issues remain under control, I expect to see RBS shares trade for over 400p.
If RBS can convince the markets that it has rehabilitated itself into a profitable and robust bank, 500p does not look an unreasonable target.
SSE is an energy, phone and broadband company. The company recently announced that it will be replacing its chief executive, Stephen Marchant, after more than 10 years. Mr Marchant has overseen a long period of success at the company. Investors will be watching closely at the start new boss Alistair Phillips-Davies makes.
In the last five years, SSE has increased its dividend every year by an average of 7.8% per annum. The dividend is forecast to increase 4.4% for 2013, to be followed by a 4.8% rise in 2014.
One sign that we are in a bull market is the way that investors treat defensive utilities like SSE. While more speculative shares are well ahead, SSE is down 2.7% so far in 2013. On a P/E and yield basis, the shares are now as cheap as they have been in the last five years.
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