I’d invest for bigger returns today in order to maximise what my portfolio could be worth in the coming years. I’d put what money I have into sectors that have been hit hard by the economic shutdown. That’s because I believe some sectors are fundamentally very profitable, but have been knocked by the lack of investor confidence. Once that confidence returns (and it will), the stock market will rise and the share prices of the companies in these sectors should outperform.
Ongoing demand for housing
With that in mind, one of the first places I’d look to invest £1,000 and to generate a larger return is in a housebuilder. The industry as a whole benefits from an imbalance of supply versus demand that favours the homebuilders, as prices generally go up. There are some exceptions to that of course, as London-focused developers have seen in recent years. But generally, that’s the trend.
As such, housebuilders typically have high margins. That’s good if you’re an investor because it provides a margin of safety. I always think if a supermarket lowers prices then wafer-thin margins can easily translate into losses. That’s much more difficult if your margins are between 20% and 30% as they are at many of the housebuilders.
In the event house prices drop, they simply have lower margins. There’s far less risk of the business swinging into the red. Another result of this is that in less exceptional times than the ones we currently find ourselves in, typically the housebuilders pay decent dividends to investors. Among my favourites are Persimmon, Bellway and Vistry.
Unloved industry with bounceback-ability?
A second place I’d look to invest for bigger returns is the industrials sector. Looking at the share prices of companies like Meggitt, Rolls-Royce and Melrose it’s clear they were hit hard in the recent market crash.
The share prices still show signs of being very cheap based on P/E and PEG ratios. Low values on these ratios show the potential for the shares to show strong growth. That’s very good news for investors looking for potentially big share price rises.
If we turn our attention to Melrose, an industrials turnaround specialist with a strong track record, we see a P/E of under seven. The PEG is 0.7. That ratio would be part of the criteria legendary growth investor Jim Slater would approve of. That’s because it shows an investor is getting growth at a cheap price, which is a win-win.
With the Chinese economy now opening back up, and European countries and the US looking to do the same, I think industrials could see demand picking up.
Housebuilders and industrials strike me as industries that have been hit harder than they should have been by economic concerns. That means if I invest in them, my returns could eventually be much bigger. Unlike airlines and travel, I expect these industries to be back on their feet quicker and to correspondingly see their share prices rise faster once life returns to a greater semblance of normality.
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Andy Ross owns shares in Persimmon. The Motley Fool UK has recommended Meggitt. 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.