The stock market is well down from where it started the year. In my opinion, this makes now a good time to buy up undervalued FTSE 100 shares, ahead of any potential recovery in the stock market. Right now, bad news is priced into the share of high-quality companies. This means they could bounce back strongly in the coming months. Especially so, when investors get more certainty around the economic damage the coronavirus is causing.
Focus on FTSE 100 shares with growth potential
As a strategy for making the most of the recent share prices dips, I’d suggest focusing on buying shares from the FTSE 100 which have growth potential. Focusing on the FTSE 100 gives you access to some of the most established brands. These companies very often have a strong international reach. This lessens their reliance on the UK for revenue and profits.
They also tend to have the most experienced management teams who can navigate through tricky waters such as the ones we are in now. They should also have the balance sheet strength to come through the crisis still trading. Unfortunately, this is something many smaller firms won’t be able to achieve.
To find shares with growth potential I’d suggest looking at companies in sectors that are growing, for example, technology, infrastructure, and housebuilding. Then I’d look at how operating profits are increasing year-on-year and on dividend growth. A lower dividend yield may also indicate a share more focused on growth.
To check the financial strength of a share, I’d look at net debt and the current ratio. I would then check recent news to make sure there hasn’t been a profit warning because of COVID-19.
Examples of these types of shares
I’d be tempted to invest any £2,000 I could in the market in shares such as Hargreaves Lansdown and Diageo. These companies all have strong balance sheets and cash flow, sustainable levels of debt, and can grow their dividends
If you want to take a bit more risk and combine long-term growth with short-term recovery potential then consider shares such as ITV, Lloyds, and Persimmon. These names have seen their share prices take a beating, but may be worth investing in. They are cyclical companies, so will be hit harder by coronavirus in the short term.
If you want to find shares with high recovery potential, then it’s worth looking at highly cyclical sectors such as banks, luxury goods, and housebuilders. Many shares in these sectors are trading on price-to-earnings ratios of less than 10. In some instances, less than 5, which indicates they may be undervalued and cheap.
Another opportunity may lie outside the FTSE 100. Spread betting company CMC Markets is likely to have profited from the market volatility in recent weeks.
I’d use £2,000 to invest in FTSE 100 shares right now. Share prices have fallen steeply in the last two months but plenty of high-quality companies have growth and recovery potential, especially once economic conditions improve.
Andy Ross owns shares in Diageo, Lloyds Banking Group and Persimmon. The Motley Fool UK has recommended Diageo, Hargreaves Lansdown, ITV, and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.