It’s been a volatile year for stock markets. And while the FTSE 100 is pushing towards 7,500, in truth, many UK stocks are trading at discounts over the year. And this creates opportunity.
The FTSE 100 is slightly up over 12 months. But that’s because the index contains a wealth of oil and resources stocks. And, as we all know, these companies have largely surged during the year.
Ongoing issues
However, companies in retail, housing, banking and other areas have suffered in the evolving recessionary environment. This is especially the case for companies that are more UK-focused. Firms with less exposure to the UK have been somewhat insulated from the recessionary environment.
It’s also worth highlighting that the damage caused by the mini-budget has not been undone. Share prices have risen across the board since Rishi Sunak came to office, but we’re not back at summer levels yet.
Buying the dip
It may seem like an inopportune time to start investing, but these knockdown share prices provide attractive entry points. In fact, I think many people are forgetting how resilient the stock market is.
While the general trend of stock markets is upwards — the FTSE 100 is approximately four times bigger today than it was 35 years ago — buying during dips can propel my portfolio forward when the market recovers.
But I’m not just on the lookout for stocks that look cheap. I need to do my research to find meaningfully undervalued stocks. Essentially, buying top-quality UK shares today while stock prices are dirt-cheap could drastically reduce the waiting time in my quest to get rich.
And while buying undervalued stocks can increase my ability to deliver enhanced returns, it also reduces my risk of losses.
Billionaire investor Warren Buffett often talks about a margin of safety. This is an investing principle that involves only buying when its market price the substantially less than a stock’s intrinsic value. Buffett has been known to apply as much as a 50% discount to the intrinsic value of a stock as his price target.
What am I buying?
Right now, I’m looking across several non-resource sectors. I’m looking at banks, such as Barclays, that have underperformed over the past year but should grow with the UK economy in the long run — especially if base rates remain above 1-2% for the long run.
But I’m also looking at other financial institutions such as Direct Line Group. It had been caught out by inflation, but the firm says it’s back to writing at target margins.
Another place to look is companies that derive a considerable proportion of their income overseas. That could be important as the UK moves towards recession. And there are plenty of these on the FTSE 100, including Unilever and Haleon. In fact, firms on the index derive approximately 75% of their revenues from outside the UK.
