You don’t need me to tell you the coronavirus pandemic caused the stock market to crash and delivered the potential to find bargain shares. First, it was the unknown economic impact of the virus that caused the market to move share prices down.
And the move was rational because it was clear company profits would be affected. However, as so often happens, the stock market over-reacted and some share prices fell too far. Indeed, many investors will have done well from the bounce-back we’ve seen in some stocks already. My belief is for some firms, a longer recovery is still ahead.
Not all companies have bargain shares
As events unfolded and companies began to report on how they’ve been coping in the crisis, the market adjusted for the new information. Of course, not all shares have bounced back. Some have even plunged lower still as the flow of company news arrived. Some sectors will contain businesses that have been damaged beyond repair. And those ones will probably not shape up as bargain shares right now.
Take the hospitality sector, for example. Before the crisis, many companies were hanging on by a thread anyway. The market in the UK for restaurants and other eating establishments was over-supplied. Many chains and individual outlets were struggling. Revenues were low or intermittent and debts were often high.
Indeed, when the furloughing arrangements have run their course, it wouldn’t surprise me to see many business owners in the sector throwing in the towel. One of the great things about social distancing and lockdowns is that it gives us plenty of time for thinking!
My guess is that restaurateurs have had a chance to escape the daily grind of ‘fire-fighting’ within their often-troubled businesses. Now they’ve had the opportunity to look at the bigger picture, they may realise that continuing with their companies isn’t worth the trouble.
Why take the risk?
It may be that competition reduces in the hospitality and restaurant sector. But, as shareholders, it’s perhaps more important to avoid stocks that could go on to perform badly than it is to find the next big winner.
So I’d avoid the sector. Indeed, the performance from ‘bad’ stocks can wipe out your advances from ‘good’ stocks, leaving you treading water with zero overall progress for years.
Things look grim for airlines and travel companies too. We’re going to have to live with coronavirus for a while until a vaccine comes along. But lockdown and social distancing may have changed many people’s approach to life.
In my own case, I’ve already resolved to eat out less often, to travel less frequently, and to spend more time picnicking and walking in the countryside instead of consuming things that cost money. Maybe others are thinking similarly?
But I do like the shares of defensive, cash-generating businesses and believe many will recover well in the years ahead. For example, I’d aim to be a buyer now of FTSE 100 stocks such as British American Tobacco, Sage, SSE, Smith & Nephew, Next, CRH and Associated British Foods and several others.
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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended Associated British Foods and Sage 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.