Share prices may have bounced back from their coronavirus lows in many cases, but I think the best of the stock market recovery is still to come.
As the lockdowns around the world ease, businesses will recover and share prices will likely reflect improved trading in the months and years ahead.
So now could be a good time to focus on which stocks to buy. We have more information to go on than we did before because many firms have been updating the market about how trading has been going through the crisis. And the directors of companies have been setting out their expectations for the future.
Cheaper stocks
In my quest to make a million from the stock market recovery, I’d first look for cheaper shares. The uncertainty of the crisis and lower short-term profits caused many shares to plummet. And lower share prices can mean better value.
However, a lower share price doesn’t guarantee better value, but it’s a good start in your search. Because we often find better value when a short-term hit to business causes a temporary setback. So, your research now could aim to find companies with recovery potential.
Of course, not all businesses will survive the effects of this crisis. So you first need to identify those that have the potential to survive and thrive after the crisis abates.
High-quality businesses
Businesses have many different characteristics and they’re not the same as each other. Many have low-quality operations characterised by small profit margins and intermittent earnings. Others are highly cyclical and look great one minute and dire the next. Some companies have huge debts and others operate in cutthroat sectors with undifferentiated offerings.
However, to ride the stock market recovery, I’d look for the best and highest quality underlying businesses I can find. And they’ll likely enjoy a strong trading niche and a well-defended economic moat. You’ll recognise such stock market stars because they’ll sport decent quality metrics, such as a high return against assets and capital employed. They often have higher profit margins and there’s usually a strong financial and trading record featuring robust and rising cash inflow.
A long-term perspective
To make a million from the stock market recovery, I’d aim to hold on to my quality shares for the long haul. If you do that, the underlying business has a chance to grow and the operational progress could reflect in shareholder returns over the years ahead.
As well as a rising share price, you’ll probably see ever greater income from the shareholder dividend. Indeed, there was quick money to be made from the recent stock market rebound if you chose your shares carefully. But we think long term at The Motley Fool. And I reckon we now have a shot at making a million from the enduring stock market recovery that could follow.
