It has been a busy week in the stock market. Many key global indices saw big falls as the week started though, since then, most have recovered.
If I had a spare £800, here is why I would happily put it into blue-chip shares today, regardless of the potential for market turmoil (indeed, I have been buying shares this week!)
Separating price and value
Taking a step back, what happens when there is a fall in the stock market? Collectively, share prices fall. Some may rise, while others move down but, overall there is a decline.
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What does this reflect? Sometimes it is caused by a reduction in the real value of a company. For example, some bad economic news may mean that a business is likely to earn less in future than was previously the case – and so is worth less itself.
But in some cases, a share price moves down (or up) in a way that does not necessarily connect to its business prospects. That could offer me the prospect to buy into a high-quality business for less than I think it is worth.
Putting theory into action
As an example, consider a share I bought during Monday’s sharp market downturn, namely JD Sports (LSE: JD).
The JD Sports share price has certainly moved around over the past. Indeed, it is 22% lower now than at the start of the year.
Part of that is down to what investors call “fundamentals” (as opposed to “sentiment”). The business issued a profit warning in January and subsequent announcements of weak trading from companies such as Nike have fuelled concerns that a tightening economy could squeeze spending on showy sportswear.
Set against that though, I see a lot to like about JD. Demand for its product has been resilient. It has a worldwide presence, economies of scale, a large customer base and a carefully crafted marketing message that has worked well for years.
Its current price-to-earnings ratio of 10 looks cheap to me. I recognise that earnings could fall, due to weaker consumer spending or the cost of JD’s ambitious store-opening programme. Over time though, I believe the JD Sports share price ought to be higher than it is now.
Building wealth over the long term
There is a bigger lesson for me in JD’s share price moves. The stock market overall can suddenly move down just as sometimes it can quickly shoot up.
But I am not buying the market. I am investing in individual shares. So I want to look for specific examples where a company I think has solid long-term commercial prospects trades for markedly less than I think it is worth.
I could get that judgement wrong, of course, which is why I always keep my portfolio diversified. £800 is enough for me to buy into several different blue-chip companies at what I think are cheap valuations, as I did this week in the case of JD Sports.
Hopefully, doing that can help me build wealth over time. If I see what I think are bargains today, why wait?
