With the UK moving forward with its lockdown-easing plan, it seems as if the outlook for the economy is on the up. With that being the case, I’ve been searching for so-called ‘recovery stocks’ to add to my portfolio to profit from the bounce. Here are two of my favourites.
FTSE 100 recovery stocks
At the top of my list is financial giant Barclays (LSE: BARC). I think banks are one of the best ways to play the pandemic recovery. These businesses could benefit from improving economic activity, leading to more lending and fewer loan losses.
At the same time, higher interest rates could boost profits, although it could be a while before the Bank of England decides to hike rates.
That’s not to say Barclays is without its risks. Another economic shutdown would inflict more pain on the lender and its clients. Further, if interest rates remain depressed for an extended period, Barclays’ profit margins will come under pressure.
Then there are regulatory issues to consider. Rising regulatory demands have pushed up group costs in recent years. If costs rise further, without a corresponding increase in income, the bank’s profit could slide.
Still, I’d buy shares in the FTSE 100 recovery stock as a way to play the economic reopening. I think banks have been unfairly punished over the past 12 months. They’re now in a stronger position financially than they were at the start of the crisis. This could lead to significant shareholder returns going forward.
I think some of the best recovery stocks to own for the next few years are construction businesses. CRH (LSE: CRH) is perhaps the best example. This is one of the largest building materials business globally, with a strong presence in North America and Europe.
In some respects, while the building industry is inherently cyclical, CRH is defensive. That’s because it’s pretty expensive and challenging to start up in the building materials business.
New competitors can’t just start selling products overnight. It requires a large capital investment, and even then, it’ll take time to build the economies of scale needed to achieve high levels of profitability.
CRH has these qualities already. That’s why I’d buy this company as part of a basket of recovery stocks.
Despite its attractive qualities, the company does have its risks. As noted above, construction is incredibly cyclical. Therefore, if the economic recovery starts to stutter, CRH’s growth may grind to a halt.
The firm also has a considerable level of debt, which could cause problems in a downturn. Due to the cyclical nature of the business, it may also be challenging to rely on the group’s dividend. At present, the stock supports a dividend yield of 2.8%.
These challenges aside, I believe CRH could be one of the best FTSE 100 shares to own in an economic upswing.
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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.