Following the recent stock market rally, some investors might feel uncertain about buying stocks at current levels. However, while some stocks currently look to me to be overvalued, others appear quite cheap. I’d focus on buying these equities with £5,000 in 2021.
Stock market rally holdings
As mentioned above, I think some stocks have gotten ahead of themselves recently. Shares in organisations like Ocado are trading at record levels. I think buying the company at this level could expose an investor to unnecessary levels of risk. If Ocado’s growth fails to live up to expectations, for example, the stock could quickly fall in value.
On the other hand, I think there’s too much pessimism surrounding UK shares such as easyJet, IAG and Barclays. The pandemic has impacted these companies, but they own some of the most valuable travel and banking brands in the UK.
What’s more, at current levels, it seems to me that much of the uncertainty surrounding the outlook for these businesses is already factored into their share prices. Many have missed out on the recent stock market rally.
For example, shares in Barclays are currently trading at a price-to-book ratio of 0.4, compared to the global banking sector average of around 1.
UK shares to play the recovery
I see these UK shares as recovery plays. As the world moves on from the pandemic in 2021, earnings and sales should begin to recover. That should help improve investor sentiment towards the companies.
That said, I’m not entirely sure all these recovery plays will last for the next 12-24 months. Companies like Carnival, which were once global leaders, have taken on tremendous amounts of debt to weather the crisis. This could hold back their recovery and growth in the long term.
As such, with an investment of £5,000, I’d look to build a diversified portfolio of these UK shares. Doing so would allow me to reduce risk while maximising upside potential. I think this strategy may even help me outperform the market.
As noted above, many of these companies have missed out on the recent stock market rally. So they’ve got a fair bit of catching up to do to get back in line with the rest of the market. This may help them outperform when investor sentiment begins to improve.
The bottom line
Many UK shares have missed out on the recent stock market rally, and these are the investments I would target for the year ahead.
Acquiring a diversified basket of these stocks may produce high total returns in the long term. Even if these businesses struggle to return to growth in the short term, I’m optimistic their competitive advantages and size will help support growth in the long run.
All of the businesses outlined also had a reputation for rewarding investors with large dividends. I believe it’s likely this trend will resume when the pandemic recedes.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Barclays. 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.