With a P/E ratio of 3.4, is the cheapest stock in the FTSE 100 index overpriced?

I believe the stock in FTSE 100 It's the index that currently offers the best value (at least statistically). Pershing Square Holdings stock price (LSE:PSH). That's because it has the lowest historical price-to-earnings (P/E) ratio of all 100 companies.

With a current (13 September) market value of £6.52bn – and net income for the year ended 31 December 2023 (FY23) of $2.54bn (£1.93bn) – it has a P/E ratio of 3.4.

That's very low (the overall index average is four times higher) and suggests the stock may be in the bargain zone.

Or is it?

Clicking numbers

The first thing to note is that Pershing Square is not a trading company, it is an investment trust. Therefore, its P/E ratio is meaningless.

For investment trusts, a better measure of value is to compare its market capitalization with the net asset value (NAV) of the companies in which it is invested. On 31 August 2024, its NAV was £50.98. Currently, its shares are changing hands at around £35.60, which means they are trading at a 30% discount.

This is a big difference. For comparison, the Scottish Mortgage Investment Trust the discount is 12%.

Also, Pershing Square looks cheap to me.

Furthermore, its return on investment has beaten the broader market since its inception in 2004. During this period, it achieved an annual growth of 15.7%. This compares to a 10.1% return from The S&P500.

This performance helped contribute to a 124% increase in budget value, as of September 2019.

What don't you like?

This all sounds very good.

Who wouldn't want to buy something that is selling for much less than the invested value, and has a long track record of delivering growth?

However, I have some concerns.

First, its portfolio is concentrated in a small number of stocks.

It typically invests in eight to 12 North American companies. Current holdings include World Music Group, Hilton, Restaurant Brands International again Alphabets.

The main reason for investing in a trust is to spread the risk across multiple companies by owning one share. This advantage decreases with a smaller number of positions.

I also note that the trust is expressed 100% in North America. There is growing speculation that a recession is coming, which could adversely affect, for example, the entertainment companies Pershing Square has in its portfolio.

Also, its investment manager charges an annual fee of 1.46%. I'm sure it will be argued that this is justified given its performance. But I feel this is expensive – the Scottish Mortgage manager charges 0.3%.

What should I do?

However, considering these concerns, now would be a good time to invest.

A significant discount to its NAV is attractive. I would have to pay about 30% more if I wanted to invest in the same companies that Pershing Square has in its portfolio.

Yes, we all know that stocks can go down. But currently there is a large buffer that provides low security.

That's why it goes on my watch list when I have some spare cash.