Stock market crash! Today’s cheap shares could be tomorrow’s winners
It’s hard to tell when we are at the bottom of a stock market crash. It’s only after it’s happened that we can see where indexes such as the FTSE 100 reached their lows.
And when the economic news is all doom and gloom and share prices are plummeting all around, it’s easy to fear that the markets could fall further.
My guess is that even now, after stocks have been bouncing higher, many investors are wary of buying shares in case we see another lurch down.
One way of overcoming the paralysis is to focus on individual companies rather than on the entire market. We’ve been seeing some interesting updates from firms lately explaining how their businesses have been coping with the coronavirus crisis.
And some firms are doing better than others. A lot of the differences boil down to the sector a company occupies. Many hospitality, travel, and retail enterprises have seen the complete lock-down of their operations and zero revenues. Others have seen their revenues partially affected, and a third group has managed to keep on trading after protecting staff with social distancing measures, such as working from home.
One thing we can get busy with right now is to analyse the stocks on our watch lists. For example, I’m looking for strong finances such as net cash on the balance sheet or modest debts. If a company is financially strong, it has a good chance of surviving the crisis even if revenues have been damaged in the short term.
I’m also looking for guidance on current trading to help me gauge a company’s chances of continuing through the lock-downs required under social-distancing rules. And finally, I’m keen on reading each firm’s outlook statement to see what the directors believe will happen next in their businesses when economic recovery begins.
I reckon we’re are in a bit of a purple patch right now. When the stock market first plunged earlier in the spring, we had precious little information to go on. Now, with company updates and reports starting to come through, we can build up a clearer picture of what may be ahead.
So now’s a good time to start nibbling away at shares, and I’ve added a few to my portfolio over the past week or so. I admit that the market could throw another curveball and take my holdings lower, hopefully temporarily. But a great way of getting your head around such volatility is to adopt a long-term investing horizon and to keep on investing whatever the market throws at you.
If we want to buy the shares of quality companies when the stock market is cheap, we’ve got to go out shopping when the economic weather is rough and the outlook unclear. When the recovery comes, we will likely be glad we did!
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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.
Motley Fool UK 2020