Top UK shares at bargain valuations are really hard to find these days. For some of the shares that are trending now, I’d wait for another stock market crash to buy. I’m sure that I won’t have to wait long – there’ll be another stock market crash pretty soon.
Stock market crash
We have all seen the news about Covid-19 restrictions being put back in place. For example, the UK recently decided to quarantine travellers from Spain, France, and Sweden. Things like this are going on all over the world right now, adding to the uncertainty created by the pandemic. It looks pretty obvious to me that if this continues, the recession will last for ages.
But as bad as that sounds, it’s not the only problem the world faces right now. One of the largest risks investors have to deal with is the US election. Even more important for UK investors are the Brexit negotiations. Although there is hope that the deal will be agreed next month, there are still plenty of potential stumbling blocks, including fishing rights and competition rules. In other words, there are many reasons for a stock market fall.
But what UK shares will be involved? Well, I think some investors will end up trimming their stakes even at the most stable firms to raise cash. The March correction showed the effect of this. Not only did the companies with poor balance sheets fall from grace – the companies with strong finances also plunged in value.
But as we know, some companies benefitted from the lockdown. Their shares regained their losses and climbed to new highs. Something similar might actually happen again, I believe.
Top UK shares
My colleague Peter Stephens wrote that the risk/reward ratio isn’t particularly attractive for many FTSE 100 companies. And I agree with him. Some time ago I wrote about overvalued high-tech companies. This particularly seems to be the case with the US stock market. But I consider Ocado (LSE:OCDO) and Just Eat Takeaway (LSE:JET) to be firms with huge profit potential during lockdowns. I think we’ll have even more restrictions due to a second wave of Covid-19. That’s why the food delivery demand will stay high for a while. So, I think Ocado and Just Eat will be the first to benefit.
But the current valuations of these shares seems excessive. I don’t just mean how much these two companies’ stocks have surged. I also mean their valuation multipliers (the price-to-earnings and price-to-book ratios), earnings, and revenue histories. Neither firm was particularly profitable before the pandemic. But after the stock market crash their shares have surged tremendously. The truth is that their market positions are leading. I believe they will be great buys after another stock market correction.