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Stock market optimism finally returns! Is it here to stay?

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Global financial markets are continuing to rise in response to the prospect of a Biden presidency and vaccine distribution. For those savvy investors that have been snapping up bargain stocks in recent months, the Biden bounce makes a welcome change. It also makes it an exciting time to be an investor. But does this mean the positive sentiment is here to stay?

Optimism in the air

Since the pandemic reared its ugly head at the beginning of the year, the UK stock market has been struggling to recover. The FTSE 100, which was sitting at over 7,600 points early in the year, is now at 6,362 as I write. In the US, it’s been a different story. The S&P 500 has had a phenomenal year thanks to the extraordinary popularity of tech stocks. It’s now approaching all-time highs.

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Although the UK hasn’t been doing as well as the US, this week’s news has shown what might be possible when the world gets rid of Covid-19. The FTSE 100 has actually risen over 14% in under two weeks, and many of its quality constituents are still undervalued. While I’m not convinced this is the start of a long-term bull run, it could be an opportune time to buy quality stocks.

Compass share price surge

FTSE 100 constituent Compass Group (LSE:CPG) is one such stock. The Compass Group share price has surged 29% this past week but is still down 24% year-to-date. It employs thousands of staff providing meals to a variety of institutions. These include oil rigs, entertainment venues, educational establishments, and healthcare facilities such as hospitals and nursing homes.

Compass share price surge on Biden bounce and vaccine hopes.

Source: Compass Group

With many of these services being closed because of the pandemic, it dented Compass Group revenues. In its third quarter, revenues fell 44% due to the US and Europe lockdowns. While this was unavoidable, the company is looking at ways to adapt to a new normal. This includes the potential for a digitally-enhanced focus and delivery options. Earlier this year it acquired Feedr, a food and health technology start-up. Compass intends to use it to accelerate its digital transformation and support vulnerable populations.

Future growth potential

In the long term, Compass has an adaptable business that could make the best of a bad situation, even if previous business levels are not reached for some time. Being such a large organisation with a strong reputation means it could pick up where smaller competitors can’t survive. It also has plans to move into outsourcing in some of its healthcare and education organisations.

Until we roll out a vaccine, the short-term outlook remains volatile, both for financial markets and the businesses affected. Deaths and Covid-19 cases are rapidly rising globally. England has gone back into lockdown, and job losses are mounting. This is increasingly worrying, and I think the markets will react to this again soon. 

Compass Group’s price-to-earnings ratio is 20 and earnings per share are 70p. Considering the Covid-19 impact to business operations, the board chose not to issue an interim or final dividend. It will keep future dividends under review but intends to restart payments when the situation improves.

I think Compass Group looks a positive addition to a long-term investor’s portfolio and so is on my watch list. It seems positioned to go the distance and offers potential upside if its share price can return to 2019 highs.

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Kirsteen has no position in any of the shares mentioned. The Motley Fool UK has recommended Compass 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.

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