Buying shares after the FTSE 100’s recent market crash can be a tough task. After all, some industries and businesses are set to experience prolonged periods of difficulty that could harm their financial performances. As such, identifying companies that can survive the short-term risks faced across the economy could be a sound move.
Furthermore, buying stocks with strong market positions that trade on low valuations could be a sound move when investing £10k, or any other amount, at present. They could deliver high returns over the long run as the FTSE 100 experiences a likely rebound.
Surviving short-term risks
Surviving an unprecedented challenge across the world economy is likely to be the priority for all businesses. As such, investors may wish to focus their capital on those hat have the greatest chance of still being in existence in the next few years.
Identifying companies with significant financial strength could be a worthwhile move for many investors. For example, buying businesses that have low debt levels and a large amount of cash could lower your risks. They may be more able to survive what could prove to be a prolonged period of reduced sales. They may even be in a strong position to improve on their current position through gaining market share from sector peers.
Therefore, taking the time to assess a company’s balance sheet before buying it could improve your long-term returns. It may reduce your risk of loss over the coming months. And it may also increase your chances of benefitting from the FTSE 100’s likely long-term rebound.
Identifying companies that have a competitive advantage is a more difficult task than buying stocks with solid balance sheets. A competitive advantage, or economic moat, is a subjective asset. For example, it could be strong brand loyalty, a unique product, or lower costs than other companies operating in the same industry.
Companies that have a wide economic moat may not be as cheap as their sector peers at the present time. However, they may be worthy of a higher valuation due to their superior long-term growth prospects. As such, their returns over the long run may prove to be higher than their industry peers.
Currently, many FTSE 100 companies are trading on exceptionally low valuations. However, in some cases, they’re warranted due to the difficult outlooks faced by a wide range of industries.
Therefore, before investing £10k, it may be sensible to understand the prospects for a business over the coming months. In other words, a company may have only a limited chance of returning to its normal operating environment over the near term. So investors may wish to demand a wider margin of safety from a company that’s not being materially impacted by coronavirus.
Valuing a company based on its future prospects may not be an easy task at the present time. But by focusing on the quality of a business, as well as its price, it may be possible to benefit to a greater extent from the FTSE 100’s likely rebound following its market crash.
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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.