“Approval of a highly effective vaccine may mark the beginning of the end to the COVID-19 economic turmoil and the beginning of a new bull market for equities”. So said Mike Bell, a global market strategist at JP Morgan Asset Management, adding “The scientists have come to the rescue and delivered what investors were hoping for Christmas this year”. Is it time to search for stocks to buy?
I could buy cyclical stocks right now
Santa may have arrived early for investors given this week’s big news that the UK has been the first country to approve the Pfizer/BioNtech vaccine for Covid-19. The government issued a statement yesterday saying the vaccine will be made available across the UK from next week.
So, the light at the end of the coronavirus tunnel is getting brighter. And news like this makes sense of the big snap-back rally we’ve seen in many London-listed cyclical stocks such as banks, housebuilders, travel firms, and hospitality companies. I’m thinking of the sharp share price rises in November from the likes of Lloyds Banking Group, Barclays, Taylor Wimpey, Barratt Developments, Greggs, and Whitbread among many others.
But where should I invest now? One approach would be to pursue the cyclical recovery trade further. Indeed, the best time to invest in cyclical stocks is when they are recovering coming out of a recession. Although I wouldn’t try to hold a cyclical share for the long term. Indeed, cyclical companies must be watched closely. They are never a buy-and-forget investment in my book.
That said, cyclical stocks tend to look superficially attractive when they are at their most dangerous. Look at how the London-listed banks sported high dividend yields and low earnings multiples for years leading up to the spring crash of 2020. They looked cheap, but those stocks were waiting to crash. There’s just no escaping the negatives arising from the cyclicality in an underlying business.
Defensive quality suits me best for the long term
Another approach now is to hunt for quality businesses with as little cyclicality in their underlying operations as possible. In other words, more defensive enterprises. And to me, it’s those high-quality, cash-generating defensive businesses that make the best potential long-term investments for my portfolio. If I pick my stocks well, each one could become a compounding machine and wealth generator for me.
And, right now, I see a window of opportunity to pick up my favourite defensive stocks at better prices. Indeed, it looks like there’s been something of a ‘dash to trash’ as investors moved money from defensives that had performed well to cyclicals that were on the floor. So, some of my favourites look attractive right now. I’m thinking of stocks such as AstraZeneca, British American Tobacco, GlaxoSmithKline, National Grid, and Unilever.
But they aren’t the only shares I’d buy for the new bull market. I’m also keen on selected smaller companies with high-quality underlying businesses such as Oxford Metrics and Oxford Instruments, as well as several others without Oxford in their name.
Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended Barclays, GlaxoSmithKline, Lloyds Banking Group, and Unilever. 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.