The track record of British equities shows that a stock market rally is on its way. While the near-term outlook remains cloudy as economies worldwide recover from sudden inflation, the long-term picture remains intact. After all, the FTSE 100 and FTSE 250 have recovered from every financial crisis since their inception, including a global meltdown of the financial sector in 2008.
That’s why buying high-quality companies at depressed valuations today could be a shrewd move. The ones with sturdy balance sheets and plenty of growth potential could be particularly interesting. Why? Because with competitors struggling, 2024 could provide the perfect conditions to steal market share.
With that in mind, let’s explore how I’d invest £5,000 right now.
Buying shares ahead of a rally
In recent weeks, the stock market has been on an upward trajectory as the economy exits the Halloween season stronger. This might be the start of the long-awaited rally or just a short-term jump as we approach the Christmas holidays. It’s impossible to know at this stage.
Personally, I’m cautiously optimistic. But that doesn’t mean throwing in all my capital all at once is a sensible idea. Instead, I’m still following a pound-cost-averaging strategy. Rallies can be just as volatile as downward trajectories. As such, bargains in the market today may get even cheaper in the coming weeks and months.
Therefore, with £5,000 at hand, it may be prudent to drip feed this capital into top-notch stocks over time. If we are indeed at the start of a new bull market, then this approach could be leaving a lot of money on the table in the long run. However, the advantage is that if prices do continue to fall, then I’d still have money available to capitalise on even bigger discounts.
Which stocks to buy?
The London Stock Exchange is home to thousands of businesses. And while the stock market, in general, has a perfect track record of recovery, that doesn’t mean every public enterprise will make it through the storm. After all, higher interest rates and inflation have a significant impact on balance sheets, especially those riddled with debt.
Overleveraged enterprises are already feeling the pinch. And even industry leaders from within the FTSE 100 are having to downsize operations just to bring debt exposure down. Needless to say, these are not the sort of companies I’m interested in owning.
So instead, I’m hunting for stocks that have low debt and high free cash flow generation. The latter is particularly important as it’s what ultimately allows businesses to become financially independent. And a firm that doesn’t need to rely on expensive loans to grow will likely vastly outperform the profit margins of competitors that do.
Obviously, cash generation and leverage aren’t the only factors to consider during the stock-picking process. But in my experience, they serve as an excellent starting point to filter out the duds from consideration.
