Right now is a good time to invest in FTSE stocks and shares. The market crash offers a unique opportunity to buy shares in wonderful companies at a discount. Much as a rising tide is said to lift all boats, a market crash sinks all shares to a degree.
The panic-selling that typifies a market crash affects all stocks, including those with excellent prospects. For example, if investors panic and sell their FTSE 250 index-tracking ETF, that triggers a sale of all shares, both good and bad, in the index.
The opportunity lies in buying stocks that have declined far more than they should have done based on their fundamentals. These stocks were dragged down by the market, rather than dragging the market down themselves.
Not all stocks are equal
Just picking a stock that is trading well below its pre-market crash peak won’t do. The market crashed for a reason. The global coronavirus outbreak and the efforts to contain it have affected economies near and far. And they will continue to do so. Considering how companies might struggle will help investors identify those that represent buying opportunities in this bear market.
Some businesses have faced a slump in demand for their products and services and may not have the financial strength to survive. Unless these businesses receive assistance, they may go bust. If they do receive support, it may leave them with even weaker balance sheets in the future.
Maybe consumers who go without a company’s product or service during the lockdown will find they can happily live without it. If a business cuts production capacity during the crisis but cannot ramp back up quickly, then a better-positioned competitor might swoop in capturing their market share.
I have recently bought shares in two companies whose prices slumped. The first was RELX, whose shares fell over 25% in the crash. RELX publishes scientific journals, legal and technical texts, provides risk and decision analytic services, and organises exhibitions. I think it is a bear market opportunity because it generates the bulk of its revenues digitally and via subscriptions. Although exhibition revenues will suffer, everything thing else is likely mission-critical for users and should hold up well.
The other company I bought was Fevertree. Its shares had been declining for a while, but the market crash wiped another 40% or so off the price. Fevertree will likely see a fall in the sales of its beverages this year. But it has a robust balance sheet to help it survive a demand slump and has historically generated a lot of cash due in part to outsourcing much of its manufacturing. I believe the company and its brand has the strength to pick up where things left off once the crisis is over.
Market crash opportunity
There will be other healthy companies that will survive and prosper and whose shares are trading at a discount right now. Buying now might be scary as no one knows for sure when the market will bottom. But remember that bull markets last longer and deliver more in gains than bear markets take away. Investors who buy shares in great companies now, at a discount, will be glad they took the opportunity the market crash has offered in the years to come.
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James J. McCombie owns shares in RELX and Fevertree. The Motley Fool UK has recommended RELX. 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.