Stock market bubble? This is how I’m investing my cash

Is a stock market bubble forming in popular growth stocks? Roland Head explains how he’s handling the current situation and where he’s putting his cash.

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I’m hearing a lot about a stock market bubble at the moment, especially in tech stocks, electric vehicles, and renewable energy. I think this probably applies more to the US market than in the UK. But even here at home, I’m seeing some pretty high valuations on popular stocks.

All of this leaves me with a dilemma. Do I invest in fast-rising growth stocks and hope prices keep rising? Or do I continue with my usual strategy of buying profitable companies at modest prices, hoping for steady long-term growth?

Today, I want to explain what I’m doing with my investing cash, and why.

Are we seeing a stock market bubble?

I don’t want to make any sweeping judgements about market conditions. I don’t think these are helpful or accurate. But I do think some popular shares are trading at levels which may turn out to be unsustainable.

In my view, one example of this is cryptocurrency miner Argo Blockchain (LSE: ARB). The Argo share price is up by more than 25% as I write on Friday morning, after the company said it had brought 1,295 new “mining machines” (computers) into production ahead of schedule.

Argo shares have risen by around 1,000% over the last year. But the stock has also fallen by nearly 40% since hitting a high of 145p in early January. I see this as an example of the kind of sudden share price swings that are sometimes seen in stock market bubbles.

In fairness, Argo’s business does appear to be growing strongly. Broker forecasts suggest the group will report revenue of £19m for 2020 and £25m in 2021. I’d guess that further growth might be possible if the Bitcoin price remains strong.

Finances don’t seem to be a problem either. Argo’s most recent accounts showed a small net cash position, and the company has since secured a £22m investment from institutional investors.

My main concern is that with the stock trading on around 125 times 2021 forecast earnings, the ARB share price already reflects a lot of growth.

Where I’m putting my cash

I don’t trust my ability to time the market and profit from fast-moving stocks such as Argo Blockchain. I know from experience it’s also possible to lose a lot of money quickly in these situations.

Instead, I’m sticking to my core strategy of buying profitable, dividend-paying stocks at reasonable prices. Most of the shares I own live in the FTSE 100 or FTSE 250, although I do have a few smaller stocks. But they’re all characterised by solid balance sheets and reliable profits.

Shares on my buy list at the moment include FTSE 100 pharma firm GlaxoSmithKline and software group Sage. I reckon these well-established businesses are likely to remain successful, as they have been for many years.

That’s not to say things can’t go wrong. Glaxo has lagged the wider pharma sector in recent years and Sage disappointed investors last year when it reported slowing growth. Both companies could remain laggards if management fail to stimulate new growth.

My strategy may seem dull and it certainly doesn’t require much trading activity. But it works for me and lets me sleep easy at night, even if we are seeing a stock market bubble.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Roland Head owns shares of GlaxoSmithKline. The Motley Fool UK has recommended GlaxoSmithKline and Sage Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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