It’s been a volatile few weeks for UK stocks, but so far the FTSE 100 has held up pretty well. Is that about to change?
With the world facing the biggest energy shock in history, I’d have expected global share prices to have crashed by now. They haven’t. But April was patchy. The FTSE 100 ended the month roughly where it began. Investors still prefer to believe the conflict will be solved somehow, and the Strait of Hormuz reopened. I’m not convinced.
Oil markets can’t make up their minds. On Thursday (30 April) a barrel of Brent crude hit $124, having more than doubled since the Iran conflict began. It’s since slumped to $108. That offers some relief. But it’s still very high. I have a bigger concern. So far, we haven’t suffered meaningful shortages in the West, but they’ve arrived in Asia, and we’re working our stockpiles down at record speed. If shortages become a reality, the shock could land.
Are we looking at a stock market crash?
HFI Research just warned of “panic buying” and hoarding as the world draws down crude supplies. It says that shortages could soon push the price past $150 a barrel. Obviously, we don’t know if that will happen, but I do think the risks are beginning to build. Next week could be very bumpy, as could the rest of May. If UK shares do crash, I have my strategy ready. I’ll go shopping for cut-price companies whose long-term prospects remain intact. I think we could be looking at a big opportunity for investors willing to hold their stock purchases for at least five to 10 years. Many already look tempting.
To my astonishment, FTSE 100 weapons maker Babcock International Group (LSE: BAB) is now one of them. I’ve watched its shares rocket for years, and thought I’d missed my opportunity, as the shares became expensive. But in April, defence stocks took a beating across the board. UK giant BAE Systems, which I hold, plunged 11.35%. Babcock slumped 13.25%.
There are plenty more opportunities like this one
Isn’t there a war on? There is, and sadly it’s showing no sign of ending. Here’s what I think happened. Babcock has flown just a little too high. Despite April’s dip, the stock is still up 270% over five years. As a result, it was expensive, with the price-to-earnings ratio nudging 30. Investors have decided to liberate some profits, and deploy them elsewhere, presumably in better value opportunities.
The slip certainly wasn’t down to anything Babcock did. There was little company-specific news last month, aside from another lucrative UK government contract win. It’s order backlog is now a healthy £10bn, giving investors real earnings visibility.
One downside is that the shares still aren’t cheap. The P/E is still 26.9, well above its 10-year average of 14.5. And if the Iran conflict is somehow solved, its shares could retreat further — but while potentially bad for Babcock, it would be good for the world on both a humanitarian and economic level, so I won’t complain. I think Babcock looks tempting today. I’m now watching it shares like a hawk, and will take advantage of any further weakness. I expect to see many more opportunities like this in the uncertain weeks ahead. I’m in a buying mood.
