Rising interest rates and the possibility of a recession have caused investors to turn their attention to the short term when it comes to stocks. Businesses that are likely to struggle in the immediate future are finding their shares falling.
This creates interesting opportunities for investors like me, who are looking for stocks to invest in for the long term. Here are two stocks that I think could be great long-term picks despite short-term headwinds.
First on my list is JPMorgan Chase (NYSE:JPM). The stock is down 30% since the start of the year.
I don’t own JPMorgan stock in my portfolio. But at these prices, I’m seriously interested in buying some.
The stock is trading at a price-to-earnings (P/E) ratio of around eight. Its historic average P/E ratio is around 12. This is because there’s a risk of JPMorgan’s earnings declining in the near future. I think, however, that the long-term prospects for the business are very good.
JPMorgan has recently been instructed to increase its capital reserves in order to guard against an economic downturn. This is likely to weigh on next year’s profits, since this money can’t be used to generate income.
I think that the bank can withstand the short-term headwinds, though. JPMorgan passed the recent stress test and CEO Jamie Dimon says the company is preparing for an “economic hurricane“.
Once the macroeconomic environment improves, I expect JPMorgan to do very well. With higher returns on equity than either Bank of America and Wells Fargo, I think that this could be a great long-term addition to my portfolio.
My other stock pick is housebuilder NVR (NYSE:NVR). I own shares in my portfolio and I’m looking to buy more at these prices.
NVR stock has fallen by almost 28% since the beginning of January because of recession fears. This is a genuine risk, but I think that the business has great long-term prospects.
In an economic downturn, house buying in the US is likely to slow down. But NVR is unlikely to get into serious difficulties, having more cash than debt on its balance sheet.
The company also has a distinctive business model. Unlike other housebuilders, such as Lennar and D.R. Horton, NVR buys land only when there is clear demand to build on it.
This limits the risk of NVR spending money developing land that is difficult to sell. And it reduces the company’s risk in a slowing property market.
I think that NVR’s distinctive strategy should allow it to use its excess cash to repurchase shares at low prices. As a result, I think the short-term headwind could set it up for long-term success.
The threat of a recession is creating interesting investment possibilities for me at the moment. Companies like JPMorgan and NVR are likely to face short-term headwinds.
As a result, their stocks have been falling. But I think that, with high-quality businesses such as these, falling share prices are investment opportunities for me.