Following the market crash, the FTSE 100 has fallen by 18% year-to-date. However, the index is now showing signs of a slight recovery, with an increase of 23% since its lows in March.
With FTSE 100 share prices climbing higher, investors might be questioning whether it is too late to buy shares in quality companies at a reduced price.
FTSE 100 bargain shares
The coronavirus fallout will impact businesses across the spectrum. It has already affected different parts of the economy in ways that we previously wouldn’t have thought possible. This has opened up some great opportunities to buy shares in businesses at bargain prices.
However, investors shouldn’t rush out and buy shares just because they look cheap.
The economy will suffer for years, and many businesses and industries will be severely impacted. Already we’ve seen the near-collapse of certain aviation and travel companies.
In times like these, investors might flock to the corporations which are trading profitably and have good management structures in place. Therefore, these are likely to still look a bit on the expensive side to value investors. At the other end of the spectrum are the businesses that are riddled with debt, with little competitive advantage over rivals.
As value investors, we want to find the middle ground. The ideal situation is when we think the market has overreacted to a piece of news and unfairly priced the shares.
I love picking up a bargain. But as Warren Buffett says, it’s “far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
Often as investors, we want to make the most amount of money possible in the quickest amount of time. We seek out bargain FTSE 100 shares, which can often be dangerous if the proper research is not undertaken.
Instead, I’d look for a business that has a predictable revenue stream, low volumes of debt and an economic moat. Over the long term, I believe these qualities will best reward investors offer the least amount of risk. Especially when a second market crash might be around the corner.
When it comes down to it, I’d rather part with my hard-earned cash for shares in a business that I can hold for decades without worrying about the bad news its latest announcement might bring.
Dividends are a bit of a divisive topic at the moment. Some investors understandably love getting a regular payment from their holdings.
However, in light of the market crash, those investing for growth might think a business should use its capital to fund its core activities and pay off any debt obligations. Famously, Warren Buffett’s Berkshire Hathaway doesn’t pay dividends. That, of course, doesn’t mean the Sage of Omaha doesn’t love receiving them.
Personally, when evaluating a company in the current climate, I take note of prospective yields but I’m not convinced they are always totally dependable.
What I’d do now
It’s still possible to grab a bargain following the FTSE 100 market crash. However, there’s more to buying shares than price. This is an unprecedented and potentially dangerous time. Pick what you buy carefully.
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T Sligo has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Berkshire Hathaway (B shares) and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares) and short January 2021 $200 puts on Berkshire Hathaway (B shares). 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.