UK stocks are more volatile than usual at the moment. Both the FTSE 100 and the FTSE 250 are much lower than a week ago.
But such times in the stock market don’t last forever. And I think now is a good time to think about which stocks will come into their own when the market turns around.
Forterra
Earlier this week, the Office for Budget Responsibility predicted that UK house prices will fall 10% from their highs at the end of 2022. In the short term, that’s likely to be a headwind for brick manufacturer Forterra (LSE:FORT).
Falling house prices are probably the biggest reason why the stock is down 25% over the last six months. The business did well in 2022, but the market seems to be concerned that this is as good as its going to get for a while.
I think there’s some justification to that thought. The brick industry is cyclical and making projections based on the company’s performance during a strong period is clearly risky.
Nonetheless, the stock has some important tailwinds behind it that are likely to prove durable. Even though demand for bricks can be up and down, the UK market is consistently undersupplied.
That’s why I’m looking to buy the stock at today’s prices. It’s not as simple as looking at today’s low price-to-earnings (P/E) ratio and a dividend yield approaching 8%, but I think the stock is a bargain.
Diploma
There’s another stock I like too at the moment. Despite (or maybe because of) some impressive earnings in 2022, shares in Diploma (LSE:DPLM) currently trade at a P/E ratio of around 33. That’s quite high and I think it represents the biggest risk with the stock.
The company’s earnings need to grow significantly in order to justify that price and the market appears to think it won’t be able to do it. That’s why the price has fallen back below where it was 12 months ago.
Diploma is a distributor of industrial components, which makes it sound like another highly cyclical business. But I think there are a couple of reasons for thinking the outlook is bright right now.
First, the company’s focus on components that are indispensable to manufacturers, but also inexpensive. As a result, they’re typically paid for as ongoing expenses, rather than capital investments.
Second, the macroeconomic outlook is improving, with forecasts now indicating that the UK might avoid a recession for the foreseeable future. This is also positive for Diploma’s business.
Nobody seems to have told the share price though, which is continuing to fall. I think this could be a great stock to own in the next bull market and beyond, so I’m looking to add to my existing investment here.
Buying stocks
In the short term, both Forterra and Diploma might be volatile investments. It’s certainly possible that both shares could fall further in a volatile and uncertain stock market.
But over time I’m expecting both companies to do well. That’s why my plan when investing for the next bull market is to make sure I’m only investing cash I won’t need for some time and to be patient.
