The stock market has been fairly volatile over the last couple of years. However, it seems the bearish mentality among investors is starting to lose momentum. In light of lower inflation and a pause in interest rate hikes, the outlook for equities appears to be improving.
Analysts from the investment bank Morgan Stanley recently revamped their expectations for a stock market recovery in 2024. And other forecasts surrounding the FTSE 100 and the London Stock Exchange, in general, are becoming increasingly bullish as well.
Obviously, there’s still a giant question mark regarding the timing of such a rally. Perhaps it’s already started, or may still be months away. It’s possible a sudden decline in economic health could postpone it into 2025.
Regardless, investors can still take action today to prepare their portfolios, positioning themselves to try and reap larger returns in the long run. Here’s how.
Snapping up crushed stocks
It’s no secret that buying undervalued shares when the stock market is in a state of panic can be lucrative. After all, arguably, the most common piece of investment advice everyone gives is to “buy low and sell high”. But just because the market capitalisation of a business has been thrown into the gutter doesn’t necessarily make it a bargain.
The shift in interest rates has created a very different operating environment for businesses. Gone are the days of “growth at any cost” since both debt and equity are now significantly more expensive to acquire.
In other words, firms that have grown complacent, relying on cheap loans to keep the lights on, are most likely to struggle in the future. This is especially true if competitors targeting the same customers are able to operate at much lower levels of leverage. Why? Because a smaller portion of cash flow is being gobbled up by interest expense, resulting in more organic funding to reinvest and grow.
However, suppose a business has been sold off on short-term concerns, but it remains a cash-generating machine with significant competitive advantages? In that case, investors may want to pay closer attention.
A stock primed to bounce back?
Looking at my portfolio, a number of growth stocks have lost their darling status among investors. And in many cases, my positions have yet to recover. But one company in particular that’s looking primed for a comeback is dotDigital (LSE:DOTD).
The digital marketing platform helps businesses increase engagement with their customer bases to generate sales, especially in areas like e-commerce. With the cost-of-living crisis taking a firm grip on most households, it’s not too surprising that performance saw a rapid slowdown in 2022. Yet, these headwinds seem to be losing steam.
Looking at the latest results, organic revenue growth is back in double-digit territory. And excluding one-time expenses, operating profit is following suit. That’s not too surprising, given that advertising titans Alphabet (Google) and Meta Platforms (Facebook) enjoyed a massive rebound in the second half of 2023.
These factors point towards the thawing of the digital advertising winter that’s plagued dotDigital over the last two years. And while the company has no shortage of competition, its newly-launched CDPX platform is proving to be a popular tool among customers. Combining that with chunky free cash flow margins makes it a stock worth buying more of, in my opinion.
