The crash in the stock market has been broad. Not many stocks are higher now than they were at the beginning of the year. Many are actually lower. I can see two ways to profit from the situation.
Some shares have fallen further than others. And generally, those that have held up best have businesses that can continue operations, even if revenue is a little lower. The biggest fallers tend to have operations that have halted completely or will likely suffer most from a recession.
Two ways to profit
And there’s an opportunity in both groups. If the big fallers can survive the shutdown financially, we could see a surge in their share prices when trading restrictions are lifted later. But they are risky because we don’t know how long this crisis will last. They should get financial help from the government. But it seems likely that some of these depressed businesses may never recover fully. Some may even go bust.
Meanwhile, if you examine the businesses behind some of the more resilient shares, my guess is you’ll find an enterprise in a robust sector that has managed to keep trading in some way. The opportunity with those beasts is to pick up a long-term holding at a lower valuation. As the economic system ‘normalises’ later, you could do well with your shares.
I have no doubt that some investors will make a fortune in the next bull market by plunging in and buying distressed shares now. Many will likely buy small-cap and medium-cap shares, which could have the greatest potential to rebound. However, with a wide market shock like this one, I think there’s ample opportunity to profit by investing in FTSE 100 shares. Such big beasts will give you the benefits of good liquidity. This means you’ll be able to get in and out easily when you need to.
Some of the more resilient businesses in the FTSE 100 are names such as AstraZeneca, British American Tobacco, Diageo, National Grid and Unilever. And I’d be tempted to buy shares in defensive, cash-generating firms like those today.
Meanwhile, other companies are more exposed to the effects of business shut-downs because of the pandemic. And often those same enterprises have cyclical operations that stand to suffer from the almost inevitable economic recession or slump that will follow. I’m thinking of names such as Barratt Developments, BT, Barclays, easyJet and Whitbread.
And that second group of firms and their kin are harder to call. We know that every major economic downturn wounds some cyclical businesses in such a way that they are never the same again. In the last great recession following the credit crunch, stock prices never did fully recover for the banking sector for example. Although the housebuilding shares went on to even greater operational and share price heights.
So rather than trying to pick individual FTSE 100 cyclical shares to ride the recovery, I reckon a FTSE 100 tracker fund will make an excellent investment vehicle. The Footsie is packed with cyclical shares ripe for a rebound. And your investment will be diversified over all of them.
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Kevin Godbold has no position in any share mentioned. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended AstraZeneca, Barclays, and Diageo. 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.