The Motley Fool

3 simple steps to boost my chances of profiting from this stock market stealth correction

Graph Falling Down in Front Of United Kingdom Flag
Image source: Getty Images

Although indices such as the FTSE 100 and others have been holding up, several individual UK stocks have been crashing.

Recent examples include fashion retailers Boohoo and ASOS, and consumer brands company THG. However, many other UK stocks have been drifting lower too. I’m thinking of names such as medical devices company Smith & Nephew, telecommunications giant BT and parcel-post specialist Royal Mail.

One Killer Stock For The Cybersecurity Surge

Cybersecurity is surging, with experts predicting that the cybersecurity market will reach US$366 billion by 2028more than double what it is today!

And with that kind of growth, this North American company stands to be the biggest winner.

Because their patented “self-repairing” technology is changing the cybersecurity landscape as we know it…

We think it has the potential to become the next famous tech success story. In fact, we think it could become as big… or even BIGGER than Shopify.

Click here to see how you can uncover the name of this North American stock that’s taking over Silicon Valley, one device at a time…

We really are seeing a stealth correction

But that small list doesn’t cover the extent of the weakness beneath the surface in the London stock market. Many steady, defensive and reliable cash-generating businesses are seeing lower stock prices as well. For examples, I’d point to companies such as IT infrastructure and services specialist Computacenter, food ingredients enterprise Tate & Lyle, and meat-based food company Cranswick.

With so many UK stocks struggling right now, it’s no wonder the recent moves in the market add up to what some are calling a ‘stealth correction’. But I think a downwards adjustment to valuations can be a good thing every now and again. And that’s especially true if the businesses behind stocks continue to trade well. After all, not all stock market movements reflect the reality on the ground.

And that’s why stock market setbacks, corrections, crashes and bear markets can provide investors like me with an opportunity to hunt for better value. But, of course, there’s no guarantee I’ll actually find it. Sometimes market reversals prove to be justified. And problems can sometimes emerge in businesses after stocks have adjusted lower.

But there are three simple steps I can take to boost my chances of profiting from this market stealth correction. The main goal is to try to avoid picking a duffer. So when it comes to selecting UK shares, I’d begin my research by applying three checks.

3 checks to help find decent UK shares

The first check is to look for a strong balance sheet. I like well-known investor Lord John Lee’s approach to this. He said in his book How to Make a Million – Slowly that he looks for conservative, cash-rich companies or those with low levels of debt. And I reckon well-financed businesses will likely be in a better position to ride out any business challenges than those loaded with high borrowings.

My second check is to look for a record of robust cash flow. And strong cash flow often supports a good record with revenues and profits as well. Many of my favourite stalwart defensive businesses have a robust trading and financial record.

And I reckon that often speaks volumes about their ability to trade through varying economic conditions. Indeed, they tend to be less vulnerable to the general ups and downs in the economy than some of the more cyclical enterprises.

Thirdly, I like to look for businesses with decent prospects. A good way to begin is by noting the consensus of City analysts’ opinions about growth in forward-looking earnings. However, there’s no substitute for digging into the latest company announcements to see what the directors are saying about the outlook, opportunities and threats for a business.

To me, these three checks are a decent starting point for my research, although they won’t guarantee a successful investment in UK shares. Nevertheless, I think it’s a good time for me to look for share investments right now.

And one place I'm looking is right here:

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic…

And with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be daunting prospect during such unprecedented times.

Fortunately, The Motley Fool is here to help: our UK Chief Investment Officer and his analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global lock-down…

You see, here at The Motley Fool we don’t believe “over-trading” is the right path to financial freedom in retirement; instead, we advocate buying and holding (for AT LEAST three to five years) 15 or more quality companies, with shareholder-focused management teams at the helm.

That’s why we’re sharing the names of all five of these companies in a special investing report that you can download today for FREE. If you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio, and that you can consider building a position in all five right away.

Click here to claim your free copy of this special investing report now!

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended ASOS, Smith & Nephew, and boohoo 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.