In my opinion, there are opportunities to buy top stocks in the market at any point in time. The market never accurately prices every stock, meaning that some are always over- or undervalued. As a result, if I can find the stocks that are attractive and avoid the ones that aren’t, I should be able to profit from an initial £1k investment.
Finding undervalued top stocks
One way I’m filtering to find the top stocks at the moment is by looking at the price-to-earnings ratio. This tool does what it says on the tin. It compares the latest earnings per share relative to the current share price.
In my opinion, a price of 10-15 times earnings is fairly valued, although certain sectors can carry higher multiples without being overvalued. So I can look and identify which companies currently have a ratio below this threshold.
For example, Kingfisher and Legal & General have P/E ratios just below 10 at the moment. If I go even lower, Royal Mail has a P/E ratio of just 5.8!
However, I do need to remember that a very low P/E ratio can be a warning sign as well. If the share price is low despite the level of earnings, it might be a sign that the outlook for the stock isn’t very good. Hence, investors aren’t viewing it as a top stock to buy now.
Buying what’s hot right now
Another area where I’d hope to find top stocks at the moment is riding the wave of topical themes. Even if the share price has been rallying recently, there could still be good value in apportioning some of my £1k. This is because the future could be bright for stocks that are hot right now, inflating the current value.
For example, commodity prices have been moving higher so far this year. Everything from oil to copper has been moving up, helping exploration and mining companies in the process. Firms including Anglo American and Antofagasta are two of the best performing FTSE 100 stocks over the past three months.
The risk here is that just because something is hot right now, doesn’t mean it will stay that way. Part of the reason for the rise in commodity prices has been due to the war in Ukraine. If the peace we all hope for is made, then prices could move lower as supply and tensions ease.
Diversifying my money
In terms of allocating my £1k, I’d want to pick half a dozen stocks, including the five mentioned above. Even though my picks from topical themes will likely be from the same sector, the undervalued P/E stocks will be from a mix of areas. This helps my overall portfolio to be diversified. That should help to smooth out my performance over time, and make me less reliant on one stock if it underperforms.
