However, minor pullbacks in the FTSE 100 happen much more frequently. Data suggests a 5% fall or more in the Footsie happens 1.5 times a year. With the last 5% fall in the FTSE 100 in January 2021, some may argue a minor fall is around the corner. Whilst a 5% drop is hardly a ‘generational buying opportunity’, it would be a fantastic time to put cash to work.

So how do I prepare for a fall in the price of the FTSE 100 and benefit from it?

Keeping a cash reserve

Given how volatile the FTSE 100 can be, I always keep between 5% to 10% of my portfolio in cash. This percentage changes based on my view of the market and whether it looks cheap or not. For example, the cash reserve generally falls to 5% or even 0% when the market drops significantly. Meanwhile, when the market looks expensive, this cash reserve could rise as high as 10%.

Keeping cash reserves also serves psychological benefits. Knowing that I have a cash buffer keeps me calm when the market drops, as I can keep buying and averaging my positions down.

Ignoring the noise

Minor corrections or crashes in the FTSE 100 are normally paired with a scary headline and a reason to panic-sell. If history is a good indication, it usually is wise to ignore these headlines and stay invested.

An excellent example of this was in 2015 when worries about a slowdown in the Chinese economy caused a fall in the share price of commodity producers. This event led to a 15% fall in the FTSE 100, with commodity producers like Anglo American falling over 30%. This fall scared many unprepared investors out of the market, only to see the FTSE 100 make new highs a year later. 

The moral of the story is that it is usually best to stay in the market and invested heavily. For individual stock investors, it also helps to understand the businesses exceptionally well. This helps me stay calm and invested when the share price drops significantly.

Bottom line

While a 20% crash in FTSE 100 is unlikely, a small 5% drop is arguably always just around the corner. In preparation for a minor correction, I have a wish list of companies I would like to buy at a lower share price, keep a small cash reserve, and stay calm when it happens.

The post How I am preparing for the next FTSE 100 crash appeared first on The Twelfth Magpie.

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Harry Godfrey has no position in any of the shares 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.

Buyout news

Speculation of a Sainsbury’s buyout started in April when billionaire Daniel Kretinsky raised his stake in the company to 10%. Such a high level of ownership is a massive hint to the market that a takeover or a change in management will occur. This change left investors excited and was the catalyst behind an extensive run in the stock price.

Recently, further interest has been received for the supermarket chain when Fortress Investment Group offered £6.7bn to buy it. At a 52% premium to the share price, it was no surprise that investors were eager, and the share price jumped. Clayton, Dubilier & Rice, a private equity firm, then improved this offer to £7bn for the company. 

With so much interest in the FTSE 100 constituent, seeing the share price perform so well this year is unsurprising. Furthermore, there is also a chance that another firm could raise the deal value again. In this case, the share price would likely jump again, rewarding investors in the process.

Beware of the dangers

Whilst there is a possibility that a new firm could raise the stakes, it could also fall apart. A buyout candidate may get cold feet about the supermarket sector or need the capital for other reasons. Based on my calculations, investors are pricing in a 98% chance of a takeover, which shows me that investors are incredibly confident or expect another raise. If the deal falls apart, the share price could see a fall back to pre-2021 levels, a 25% drop.

Holding Sainsbury’s stock also comes with other risks. In an earlier article on fellow FTSE 100 member Tesco, I mentioned the rise in competition in the shopping market and the negative effects of the economy reopening. There is also a nationwide CO2 shortage that is affecting supermarkets. The repercussions of this shortage are that the frozen and meat shelves, which rely on food-grade CO2 heavily, are quickly running out of supplies. Without immediate government action, this could last months, and Sainsbury’s revenue figures could suffer.

Bottom line

News surrounding a takeover of Sainsbury’s is likely to be the main factor moving the share price in the next 12 months. If another firm raises the buyout offer, Sainsbury’s share price will likely experience another huge run. On the other hand, investors will probably see a significant drop if the deals fall through. At this moment, I am sitting on the sidelines and waiting for new news on the topic.

The post This FTSE 100 stock’s share price is up nearly 30% this year: can the rally continue? appeared first on The Twelfth Magpie.

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• Sainsbury’s share price looks 53% undervalued to me, and here’s what the market may be missing…

Harry Godfrey has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. 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.

Tesco is a perfect candidate for a rebound with a disappointing 2021, down 12% for the year. Most of the fall happened in February when the share price fell a staggering 25%. Since then, the stock has rebounded strongly, up 15%. Let’s dig into why this crash happened and what to expect going forward.

The February crash

This ‘cliff-like’ drop in February was due to Tesco selling its business in Malaysia and Thailand to CP Group. Selling for £7.6bn, around £5bn of the proceeds went to shareholders as a special dividend, whilst the rest went to the employee pension fund. According to management, this will help simplify and focus the Tesco business. Without this source of revenue to rely on, the Tesco company is now worth a lower amount to an investor, hence the sharp drop in share price.

I agree with management and see the sale as a net positive, allowing the company to focus on its core markets in the UK and the Republic of Ireland, which are particularly strong. This is evident in the two-year sales growth in the UK, which was 9%, while growth in the Republic of Ireland was a high 13%. If Tesco can sustain such high growth rates, it will likely prove to be an excellent investment for me.

Difficulties lie ahead

However, keeping growth rates at a high 9% in the UK will not be an easy feat. 2021 has seen lockdown restrictions ease and the UK moving back to normal, with bars and events opening. This change has likely caused more money to flow into restaurants and less into supermarkets like Tesco. As a result, revenue figures could suffer this year, and the share price performance could be weak.

Furthermore, the shopping sector is becoming extremely competitive. The development of online shopping has caused new competitors to enter the market and take market share from retail giants. One noteworthy company is Ocado, which is expecting “strong revenue growth in FY22”.

Low price competitors, like Lidl and Aldi, have also taken a substantial portion of the market in recent years and are hungry for more.

Bottom line

The dramatic fall in February may seem scary on a stock chart, but digging deeper, it had little to do with business fundamentals. As a long-term investor, if Tesco can fend off fierce competition and develop its online shopping option, it is likely to be a bargain for me at these depressed levels.

The post The Tesco share price has rebounded, is it time to get in quick? appeared first on The Twelfth Magpie.

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Harry Godfrey has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. 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.

A global clothing brand

Boohoo (LSE: BOO) has been a long-standing favourite for me after buying the stock in March 2020. Since buying, the shares have risen over 40%. With a current share price of £260 and average analysts’ price target of £350, there is 34% upside potential for investors.

In my opinion, Boohoo is the perfect growth stock to add to my portfolio. 2020 was a brilliant year for the company, with active customers growing 28%, hitting 18 million. This increased traffic translated to a 41% growth in revenue, led by international revenue up 44% year on year.

2021 is expected to be another breakthrough year for the company. Management expects revenue growth to be between 36% to 38% and adjusted EBITDA margin to stay at 10%. The high predicted growth rate of 38% makes the price-to-earnings ratio of 36 look like a bargain.

This growth will be driven by the new companies acquired over the Covid pandemic. For instance, in February 2021, the company acquired Debenhams for £55 million. Boohoo will add this to its portfolio of 13 clothing brands. With such a diverse portfolio, there will be plenty of growth opportunities for the group to explore in the future.

But this growth stock is not without its problems. In 2020, a supplier for the company got investigated on slave labour allegations at its Leicester factory. The management responded swiftly to the issue by starting a full investigation, where hundreds of suppliers got sacked. Although they have successfully dealt with the problem, the investigation is still in the public eye, and new news on the issue is always possible.

There is also a risk that when society returns to normal, consumers will leave Boohoo to go to brick-and-mortar shops like Primark. If true, Boohoo’s top line growth would likely suffer.

Bottom line

Boohoo is a solid growth stock trading at a historically low valuation. Furthermore, its diversified portfolio of reliable companies will likely provide multiple growth opportunities for years to come. But it does have problems that investors should keep a close eye on. I am mainly watching out for new information on the Leicester scandal, which would likely hurt the share price performance.

The post 1 growth stock to buy right now? appeared first on The Twelfth Magpie.

More reading

• How to buy growth stocks at below-market prices
• Are Meta shares at the start of a comeback?
• With dividend yields averaging above 7%, are these 2 UK shares worth considering?
• How much do you need to invest in dividend stocks to be able to retire?
• FTSE 250 stock CMC’s shares have rocketed 51%! What’s going on?

Harry Godfrey owns shares of boohoo group and the FTSE 100. The Motley Fool UK has recommended boohoo group. 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.