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Stock market recovery: Is now the perfect time to buy shares ahead of a Santa Rally?

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Could the FTSE 100 really end the year above 7,000? The stock market recovery seems to already be underway, on the back of positive Covid-19 vaccine news. Getting back to that level would also just mean the FTSE 100 returning to quite a bit below where it started 2020.

With cyclical and value stocks dominating the FTSE 100 (think banks, insurers, and big oil producers) there’s in my mind the very real prospect of a strong Santa Rally this year. For those not in the know, that’s the term for the stock market traditionally, more often than not, performing strongly in December.

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Buying shares in the stock market recovery pre Santa Rally

I’m optimistic about the prospects for the stock market in the final month or so of what has been, to date, a difficult year.

I do believe there could be a sustained recovery in value stocks in particular. Those share prices hit hardest by the pandemic have the greatest potential to bounce back. In some cases, the bounce back could be swift and spectacular.

That’s why I’ll for now be avoiding the big winners under the pandemic – growth shares. Especially those in the technology industry. I expect their shares will be less sought after in the coming months. 

However, the trap to avoid with value shares is buying only in expectation of short-term profits. A Santa Rally isn’t guaranteed, so I also want to avoid those shares that face long-term issues or have too much debt. Examples being Cineworld and Aston Martin to name just two. Instead, I’ll look to buy shares in a quality company well poised to gain from the stock market recovery. 

I’m a buyer of this share ahead of a Santa Rally

The shares I most recently purchased were in Diageo (LSE: DGE). They were understandably hit hard by the pandemic. Pubs and restaurants closed and they are big customers.

However, Diageo has over 200 brands and sells around the world. The strength of many of the brands like Johnnie Walker, Captain Morgan, and Guinness you could argue — and I do – act as a moat for the business. The moat provides protection to the brands from competition, allowing Diageo to keep prices and margins up.

It’s a big UK-based player in the global beverages industry. It can also buy growth as some of the big FTSE 100 companies do. This prevents it from becoming stale and means it can own exciting challenger brands.

As a leader in its industry, I like investing in Diageo. It has scale, pricing power, the ability to buy faster growing brands, and to sell internationally.

I’m confident adding to my holding in Diageo. As a long-term hold for me, it’s in my SIPP. Unless the performance of the business drastically worsens I see myself being a buyer of the shares for many years to come. But even more so now with the share price combining being cheap and having momentum. The stock market recovery is likely to have a very positive impact on Diageo’s share price. 

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Andy Ross owns shares in Diageo. The Motley Fool UK has recommended Diageo. 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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