The S&P 500 has more than doubled, but I’d buy the best UK stocks

The US market has been on fire over the last five years, but Paul Summers explains why he’d rather put his cash to work buying the best UK stocks.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

The S&P 500 index is now up over 100% since 2016. I think that’s an incredible return, considering the trials and tribulations faced by the global economy over the last five years. It also makes the performance of the FTSE 100 — 5% up over the same period — look derisory. Even so, I still think there are plenty of reasons to keep throwing my money at the best UK stocks.

Why has the S&P 500 outperformed?

That’s an easy one. Even those with only a passing interest in business and stock markets will know that US tech companies such as Apple, Amazon, Alphabet and Microsoft have been on an absolute tear over the last five years. All now have valuations in the trillions of dollars.

5 Stocks For Trying To Build Wealth After 50

One notable billionaire made 99% of his current wealth after his 50th birthday. And here at The Motley Fool, we believe it is NEVER too late to start trying to build your fortune in the stock market. Our expert Motley Fool analyst team have shortlisted 5 companies that they believe could be a great fit for investors aged 50+ trying to build long-term, diversified portfolios.

Click here to claim your free copy now!

Since these companies have grown so big (and the S&P is weighted according to size), they now make up a much larger proportion of the index. This means those above have a far larger impact on overall performance compared to those lower down. So far, that’s been great news for investors.

The only problem is that the US market now looks extremely expensive, based on its CAPE (cyclically adjusted price-to-earnings) ratio. This calculates a valuation based on earnings per share over a 10-year period. As a result, it helps to smooth out fluctuations in earnings that occur naturally over the business cycle.

Right now, the US’s CAPE is around 38. The only time it’s been higher is before the dot com crash in 2000. By sharp contrast, a CAPE of 15 implies the UK market is still great value. The number of recent takeovers we’ve seen would tend to support this. UK plc is effectively on sale!

A few things to remember…

First, the UK and US markets aren’t the same. We lack tech titans, for example. This doesn’t mean it’s necessarily a waste of time to compare performance. But it does mean we probably shouldn’t base any investment decisions purely on the CAPE.

Second, the quality of UK companies — like in the US — varies greatly. Looking at shareholder returns, the FTSE 100 contains some awful businesses, a lot of average ones, and a few that are brilliant. If I’m going to pick stocks, it’s vital I can identify the latter. For this, I tend to use the same strategies favoured by top UK fund managers, such as Terry Smith and Nick Train.

A follow-on point is that the best UK shares rarely come with a bargain price tag. So when I mention buying the best UK stocks today, I’m talking about striking a balance between value and quality. In practice, this might mean buying an expensive-looking stock if I’m confident it could still deliver a great return over the long term. It also might mean avoiding something even though it appears ‘cheap’ at face value.

I’d buy British

If this sounds like I’m bearish on Uncle Sam, let me be clear. I won’t be ditching my holdings in quality US stocks (or funds holding them) because the S&P 500 is due a correction or crash. Experience has taught me that trying to time the market is something I can’t do. However, I do think there’s a potential for better gains from our home market as post-Brexit, post-Covid-19 sentiment improves.

There remain risks, of course, but I still think now’s the time for me to buy British.

One FTSE “Snowball Stock” With Runaway Revenues

Looking for new share ideas?

Grab this FREE report now.

Inside, you discover one FTSE company with a runaway snowball of profits.

From 2015-2019…

  • Revenues increased 38.6%.
  • Its net income went up 19.7 times!
  • Since 2012, revenues from regular users have almost DOUBLED

The opportunity here really is astounding.

In fact, one of its own board members recently snapped up 25,000 shares using their own money...

So why sit on the side lines a minute longer?

You could have the full details on this company right now.

Grab your free report – while it’s online.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Paul Summers has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Microsoft, Netflix, and Zoom Video Communications. The Motley Fool UK has recommended the following options: long January 2022 $1,920 calls on Amazon, long March 2023 $120 calls on Apple, short January 2022 $1,940 calls on Amazon, and short March 2023 $130 calls on Apple. 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.

More on Investing Articles

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

With no cash to invest, here’s how a falling stock market could still help me to get rich

Stephen Wright explains why falling share prices might be good news even for an investor with no cash on the…

Read more »

Business people shaking hands
Investing Articles

Director dealings: Lloyds, IAG, SSE

Director dealings can indicate whether a company's doing well. So, here are this week's director dealings from three of the…

Read more »

Hand flipping wooden cubes for change wording" Panic " to " Calm".
Investing Articles

Why Kingfisher’s DIY empire could mean it’s a recession-proof stock

Kingfisher’s stock has been pummelled in recent months, but historically DIY stores have done well during recessions.

Read more »

Burst your bubble thumbtack and balloon background
Investing Articles

4 recession stocks that I’d buy to protect myself

Jon Smith talks through some of the recession stocks he has on his watchlist, ready to go if the economy…

Read more »

Happy diverse people together in the park
Investing Articles

My Stocks and Shares ISA is in the red… and I’m still smiling

Having not invested through a downturn before, this is the first time I've seen my Stocks and Shares ISA showing…

Read more »

University graduate student diploma piggy bank
Investing Articles

Should I be concerned about the windfall tax for my BP shares?

What does the new UK windfall tax mean for the BP share price? Michelle Freeman digs into the details to…

Read more »

Buffett at the BRK AGM
Investing Articles

What Warren Buffett’s wisdom and investing in stocks will teach you about life

Investing is a journey of self-discovery. So what will stocks and the words of legendary investor Warren Buffett teach you…

Read more »

Smiling senior white man talking through telephone while using laptop at desk.
Investing Articles

5 ‘no-brainer’ income stocks to buy today!

Amid soaring inflation, I'm looking at these income stocks, offering big yields, to grow my portfolio.

Read more »