In the past week, Hargreaves Lansdown investors have been buying Rolls-Royce (LSE:RR) and Lloyds (LSE:LLOY) shares. The two FTSE 100 companies are among the top three most bought UK shares within the wealth management firm’s client base.
Both stocks have clearly experienced a hugely challenging year that’s seen their share prices fall. Could more of the same be ahead? Or is now an attractive opportunity for long-term investors to purchase two undervalued stocks to make gains in the coming years?
Rolls-Royce shares: a buying opportunity?
The Rolls-Royce share price has experienced a hugely challenging period since the start of the year. At the present time, it’s currently down around 55% year-to-date. Investors have become increasingly concerned about its financial outlook, as grounded flights have led to reduced demand for its services.
Clearly, its short-term prospects are very dependent on the outlook for the civil aviation sector. Therefore, further share price volatility seems likely. However, the company’s strategy to cut costs, improve its balance sheet and invest in new technology could pay off in the long run. It may also make gains in a stock market recovery. That’s because investor sentiment towards today’s unpopular stocks could improve relative to other UK shares.
Lloyds share price recovery potential
As well as a fall in Rolls-Royce shares this year, Lloyds has been among the FTSE 100’s worst-performing stocks. It’s currently down 40%, while the wider index is around 16% lower on its 2020 starting price.
Lloyds has recently announced a new CEO and chairman. This could create a period of uncertainty for the bank’s shares, as a strategy shift may take place. However, the company could benefit from an improving economic outlook as risks such as Brexit and coronavirus gradually recede during the coming years.
With Lloyds’ operations focused on the UK, it could benefit more than its FTSE 100 sector peers from an economic recovery. As such, with its shares appearing to offer a wide margin of safety after their recent fall, it could offer capital appreciation potential in a long-term stock market rally.
A long-term view of UK shares
The outlook for UK shares such as Lloyds and Rolls-Royce may be uncertain at the present time. However, the past performance of the FTSE 100 and FTSE 250 shows that buying undervalued shares and holding them for the long run has been a profitable strategy. For example, buyers of FTSE 100 stocks after the global financial crisis are likely to have benefitted from the index’s subsequent rally to a new record high in the years following the crisis.
As such, using the same approach today could be a means of capitalising on low share prices prompted by the 2020 stock market crash. That way, investors can generate impressive returns as a likely long-term stock market recovery takes hold.
