David Holding thinks that, more than ever, the next few months will be a stock picker's market.
For those brave enough to buy a ticket for the stock market roller-coaster and for those already on board, the next few months may present a rare opportunity. But which, if any, Phoenixes will be rising from the ashes? I’ve a feeling that – now more than ever - it will be a stock-picker’s market.
Of course, many pundits have been predicting a rally for months now, only to be kicked severely when they were already down in the last few weeks. In fact, the financial hurricane that swept through markets in September made it the worst month for the stock market since Black Monday in October 1987.
I mused in July last year whether the music would stop. It certainly did – but I had no idea how quickly and how severely. Anyway, I’m sure we’re all bored to tears in reading about the credit crunch, so what happens next?
Well I’ve no idea, but the interesting thing is that nor has anyone else, no matter what they may say. It is different this time. That said, it’s slightly different every time and markets have a habit of recovering, eventually; it’s human nature. It’s also all about timing.
As investors, we’ve got to make decisions based on all the knowledge we can amass and in the spirit of nailing my colours to the mast, I reckon it’s a time to be bold; but it’s also a time to be extremely choosy.
OK, so which shares?
Before investing in any shares, today, we have to ask ourselves a few questions about likely scenarios. All the banks are in trouble on earnings, no matter how conservative they may have been, relative to their peers. Therefore, despite the potential bailout, the credit woes look likely to continue for some time yet.
And although we’re all reading about it and maybe cutting our expenditure a little here and there, I’ve a feeling we ain’t seen nothing yet in terms of consumers drastically cutting down on discretionary expenditure. Marks & Spencer confirms the fragility of consumer confidence today whilst Nationwide says that house prices have dropped by 12.4% in the last year. Consumer spending patterns are surely changing radically against this backdrop?
So first of all, we need to be thinking about companies supplying regular, essential goods and services that will better withstand spending cuts come rain or shine.
Next we need to consider the severity of competition and the consequent pressure on margins. Will prices be slashed just to stay alive? Is there a big player in the market who could afford to squeeze the others out for market share alone?
Perhaps most importantly of all, what is the balance sheet and cash position of the company that can tick the two boxes above? This is certainly not a time to be seeking new funding at favourable rates (and preferably not at all!) – nor to be struggling for cash-flow.
A company that meets these requirements and that can maintain or better still grow demand, could well be a cracking buy now – particularly if it has already been hammered, unjustly, with the rest of the market.
Applying these specific criteria over the months ahead – in addition to your usual checklist – could yield excellent returns for brave investors.
Now all we have to do is find some…
This discussion thread is considering the same question. Some utilities may throw up opportunities, but they aren’t likely to be exciting ones. There’s a lot of discussion about future oil prices, but many stocks in the sector are looking unfairly punished as the oil price slides. Discount food retailers and suppliers could do well – and individual banks will be a great buy at some point…
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