The FTSE 100 finished down 1.2% on Friday. That came as stock markets around the world plummeted, with investors clearly concerned. One of the main drivers has been a move out of growth stocks. This is particularly in technology as some of these stocks’ lofty valuations are called into question. Yet even if we see this move lower continuing in weeks to come, I can still identify some top stocks that should outperform the index as an average.
Making notes on value stocks
There are a few areas that I look to when the situation in the market isn’t great. As a general sector, I always consider adding more value-driven stocks. Value stocks are often mature companies that have a share price below their fundamental value. These might not offer as exciting returns as growth stocks, but any disconnect to the long-term fair price can represent a buying opportunity.
For example, both Barclays and B&M European Value Retail fell over 8% last week. As a top tier global bank, I think that Barclays shares should have recovered and added gains when I consider a one year or longer time horizon. The probability of several rate hikes from the Bank of England this year should act as boost.
B&M European Value Retail operates a range of price-driven stores in the UK and abroad. The January trading update was positive, and the nature of the business means that I wouldn’t expect demand to fall suddenly, even if the economy started to underperform. So given the fall in the short term, I think it looks a good buy.
Of course, a risk with value stocks is that the share prices can remain deflated for a long time before recovering.
Adding defensive options
Apart from the top value stocks mentioned above, I can also consider consumer defensive stocks. As a note, these aren’t mutually exclusive categories. I might find a good consumer defensive stock that also is a value stock.
Consumer defensives are those that shouldn’t be overly impacted by the state of the economy. They typically provide services or offer products that are necessities or as basic goods. Within the FTSE 100, this includes Kingfisher and J Sainsbury.
Kingfisher operate hardware stores, selling everything from nails to garden equipment. I think it’s a smart buy if I’m concerned about the prospect of a market crash coming up. J Sainsbury is a well-known supermarket chain. I think we’d all agree that I’ll probably continue shopping at my local Sainsbury’s (if I haven’t already switched to Aldi or Lidl) for bread and milk, regardless of my economic fortunes.
Expectations for my top stocks
Even though I think the four options are sound, I’m realistic about the share price performances. If we do see a situation where the FTSE 100 falls by 20%-30% in a short period, it’s unlikely the four stocks will give me a positive return. However, the losses could be smaller than the FTSE 100 average. Further, unlike some growth stocks that could be overvalued even after a crash, I think these top stocks will move higher to reflect long-term demand as the market recovers.
I can’t predict if a market crash will come soon or not, but regardless of that, I’m considering buying all four of them for my portfolio.
