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Hidden gems: these 2 FTSE 100 shares look ready to take off

Suraj Radhakrishnan — Thu, 04 Aug 2022 13:58:00 +0000

The FTSE 100 index hosts some of the top companies in the world. While the index receives a lot of investor interest, it is not equally distributed across every company. Darlings like Rolls-Royce and Lloyds see high daily trading volumes, while other top companies are overlooked, especially during a bear run.

I have identified two such FTSE 100 shares that are currently in the bottom half of the index when ranked by the 30-day average trading volume. And I think these companies look like they are ready to explode when the next bull run hits.

Overlooked superstars

Spirax Sarco (LSE:SPX) and Croda International (LSE:CRDA) were big pandemic winners. Between March 2020 and December 2021, these two shares gained over 110%. In fact, Croda International was a top FTSE 100 performer across 2021, jumping 57% in a year.

But since this bull run, both shares have fallen significantly. Croda bottomed out at 4,490p in June 2022 after hitting all-time highs in December 2021. Spirax-Sarco too fell over 46% during the same period, bottoming out at 9,130p.

This caused investor interest to dampen. Thirty-day trading volume for Spirax-Sarco and Croda is currently at 168,000 and 434,000, respectively. For comparison, Lloyds shares recorded 205.33m trades during the same period.

But I think the tides are changing. Since the June low, both companies have rebounded by over 22%, showing me that if the market is healthy, these shares could grow very fast.

Finances

Croda International is a speciality chemical company operating in Britain for over a century. It focuses on chemicals used in beauty and personal care products. The firm also has a huge agriculture wing that focuses on chemicals required for crop growth.

The recently released first-half (H1) 2022 results showed that sales jumped by 21% compared to H1 2021. Similarly, profit before tax went up 26% to £636.5m including proceeds from recent sales.

The company recently redoubled its growth efforts in the fragrance industry, which is witnessing strong growth in emerging markets. It has a projected valuation of $58.8bn by 2022 which would bring compounded annual growth to 5.6%.

The second company on my list, Spirax-Sarco, is an engineering firm with a focus on steam management systems. This share gained a lot during the recent green energy push across Europe. And this has gathered more steam this year, making the market ripe for Spirax-Sarco, which creates efficient energy systems for industries.

In 2021, the company recorded a revenue of £1.3bn, up 17% from 2020. Total profits were £340.3m with an impressive margin of 25.3%. A strong positive is that insiders purchased Spirax shares worth over £462,000 last year and sold nothing.

While these are strong signs for both companies, I think there are some concerns to address. Both boards have noted fluctuating commodity prices as a major cause of concern for the coming months. Also, Croda has been spending a significant amount on R&D, which could backfire if there is a market crash.

And it is unlikely that these companies will recreate the runs they had in 2020. But given the strong fundamentals and large market share, I think I would make an investment in both companies in 2022 provided the rebound continues.

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Suraj Radhakrishnan has no position in any of the shares mentioned. The Motley Fool UK has recommended Croda International. 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.

Stock market crash: 3 criteria to help you profit from the FTSE 100

Rachael FitzGerald-Finch — Thu, 07 May 2020 07:54:17 +0000

If you want to profit from the FTSE 100, I can’t think of a better time to do it than during/after a stock market crash. You see, even great companies can often be speculative investments. But a market crash can remove some, if not all, of the ‘speculative’ bit.

Often, for many FTSE 100 companies, the price you pay can be far higher than the actual tangible value of the company on its accounts — its net asset value (NAV). Indeed, this is why many value investors will often look for stocks trading at prices close to the NAV figure. And after the coronavirus crash, there are definitely more of these firms in the Footsie.

However, a stock is not necessarily a great investment just because it’s trading near its NAV. If you want to profit from the bear market, you need to find a stock with three additional factors: a moderate price/earnings (P/E) ratio, a strong financial position, and a realistic prospect of future earnings.

1. Moderate P/E ratio for the FTSE 100

The P/E ratio is the current share price divided by the earnings per share (EPS). It gives a rough idea as to how a firm’s price compares with its actual value. My advice is to work this out this yourself using the average EPS figure from the last three years and the current price. This will give you the best estimate of earnings because it evens out fluctuations.

The late financial sage Benjamin Graham advised limiting your company selection to stocks whose average P/E is no higher than 15. I can’t disagree with him, but bear in mind that a normal P/E range for one industry will differ from another one.

Due to the crash, many Footsie companies will now be trading on a lower P/E than previously, meaning values are better aligned to prices.

2. A strong financial position

Right now, a company needs a sizeable pot of working capital to get it through the hard times. Benjamin Graham used a current ratio test of 2:1. This means that current assets should be twice the current liabilities. This ratio, and a long-term debt figure lower than the amount of working capital, are good indications that the firm will likely have the cash flow to survive the bear market.

3. Prospect of future earnings

A realistic prospect of future earnings implies a well-managed company with stable income and some year-on-year growth. It’s a good sign if a firm can grow EPS year-on-year for a decade or more, through different stages of the business cycle and varying economic climates.

Positive earnings per share for the last 10 years is a good test. Even better if a firm has increased its EPS by one-third over that 10-year period. This test is tough enough to eliminate risky firms but not too restrictive when it comes to choosing stocks. The 10-year period is long enough to see if management knows what it’s doing, and will include good and bad times.

An investor needs to be realistic with expectations after a stock market crash. Forget brilliant company prospects for the time being. However, if you focus your stock picking on the above three criteria, I think you’ll find some good FTSE 100 investments to profit from in the future.

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Rachael FitzGerald-Finch 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.

2 FTSE 250 growth stocks I’d buy if markets crash again in May

Paul Summers — Mon, 27 Apr 2020 06:48:58 +0000

The bounce we’ve seen in the markets during April has gone some way to repairing the damage wreaked by last month’s crash. Last Friday, the FTSE 100 closed 15% higher than where it was on March 23. The more domestically-focused FTSE 250 was 22% up from the low it hit on March 19.

Will this recovery prove short-lived? No one can say with any certainty. What we can do, however, is prepare ourselves for all eventualities. This should include keeping a list of quality stocks to buy if things head south again. Here are two that feature on my own.

FTSE 250 star

Hull-based meat supplier Cranswick (LSE: CWK) fell along with everything else last month as investors made a ‘dash for cash’ and sold anything they could. Since then, the share price has recovered to pretty much where it was in February.

At least some of the rebound is likely down to investors realising that the company is a probable beneficiary from the UK lockdown since it supplies food products to major supermarkets. While this boost may prove temporary, the company is also seeing great demand as an exporter due to the African swine fever that has decimated pig herds in China.

Aside from these growth catalysts, Cranswick is a well-run company. Operating margins may be slim, but the balance sheet looks fine and a record of consistently hiking its dividend smacks of management’s ongoing confidence in the business.

The only issue I have with the company at the moment is its valuation.

The shares trade on 23 times earnings. That’s not cheap relative to the market, nor Cranswick’s own average valuation over the last five years (20 times earnings).

As such, the FTSE 250 member stays on the watchlist for now. Should we see a resumption of market volatility as a result of a dreaded ‘second wave’, I’d certainly be interested in buying a stake.

Long-term growth

Also falling significantly in March was investment platform provider AJ Bell (LSE: AJB). Like Cranswick however, it too has recovered strongly, particularly following last week’s encouraging trading update.

Customer numbers rose at a record rate over the three months to the end of March with the company adding almost 21,000 people to its books. This brought the total number using its platform at the end of the period to just over 248,000.

For me, this is yet more evidence that AJ Bell could prove a winner for growth-focused investors. As well as tapping into the long-term trend of more people saving for their retirement, the company boasts an excellent balance sheet and a committed CEO in founder (and significant shareholder) Andy Bell. At £1.5bn, its market cap is also less than a quarter the size of FTSE 100 member Hargreaves Lansdown.

Once again, the only real negative I see in the investment case is the valuation.

A price-to-earnings (P/E) ratio of 44 is positively vertigo-inducing in the current climate, especially as its aforementioned rival trades on ‘just’ 26 times earnings. The latter also generates even higher returns on capital employed — something Terry Smith deems crucial when screening for potential investments.

I’ll pay up for quality, but I’ll try not to overpay when doing so. I’ll look to add to my current holding (purchased shortly after listing) if May brings more stock market misery.

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Paul Summers owns shares of AJ Bell PLC. 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.

The stock market rally might not last. Here’s what I’m doing

Paul Summers — Wed, 08 Apr 2020 11:39:56 +0000

The huge bounce in markets over the last couple of weeks has been almost as sensational as the crash that preceded it. By the close of play yesterday, the FTSE 100 and FTSE 250 were up 14% and 19% respectively, since the lows of 23 March.

UK investors seem optimistic again, bullish even. I’m not quite as confident.

Why so serious?

Don’t get me wrong — the fact that some curves are beginning to flatten is clearly very encouraging news. However, expecting the mother of all economic recoveries in double-quick time just doesn’t sit right.

For one, lockdowns will be lifted gradually and perhaps reinstated. Non-essential businesses will remain shut. Regardless of how much stimulus the government throws at the problem, further pain is inevitable. Many jobs perceived as ‘safe’ could still end up being lost.

As investors, we also need to think about this from a psychological perspective. Will people feel as secure in their jobs (assuming they still have one) as they once did? Aside from the odd ‘treat’, will they be likely to go on a spending splurge once the restrictions are lifted? Even if they are in the fortunate position of having no financial concerns, will members of the public be rushing to, say, sit in a plane or a cinema? I’m no so sure.

So, don’t buy at all?

I wouldn’t say that. Having fallen so far in 2020, stock markets arguably offer a better risk/reward trade-off than before. As long as you intend to hold for a long time, continuing to buy cheap index trackers or diversified active funds feels logical. We Fools invest for years and ideally, decades. If indices are still below previous all-time highs in 20-30 years time, we’ve probably got bigger things to worry about.

Things get a lot more tricky, however, when we focus on individual companies. Remember that some won’t be making a penny of revenue at the moment. As such, traditional methods of valuation, such as the price-to-earnings (P/E) ratio need to be used with caution.

Take Cineworld as an example. Its share price rose 49% yesterday after its dividend was scrapped. Is the company 49% more valuable than it was on Monday? I’d argue not, simply because the earnings outlook definitely hasn’t improved. Consequently, wild share price moves like this don’t inspire confidence.

This is not to say that that all individual company stocks should be avoided, but I think it requires investors to be even more fussy than usual. Only high-quality companies should be making the cut, in my view. Firms with sound finances, strong management and competitive advantages will, after all, always be those most likely to help investors grow rich over time.

I could be very wrong

I’m no more informed about the future market direction than you (although I’m very confident the long-term trend is most certainly up). Notwithstanding this, I’m sceptical that the recent surge can last.

So, I’m hedging my bets. If share prices keep rising, I’ll be happy because I have some money invested. I’ll celebrate because I didn’t panic and sell everything as coronavirus raged across the world. If they continue falling, I’ll have some dry powder to take advantage and buy.

Bear markets last roughly a year on average. We’re only one month into this one. I’ll continue to tread carefully while watching out for solid opportunities.

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Paul Summers 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.

Don’t waste the market crash! I think it’s a great time to open a SIPP or Stocks and Shares ISA

Paul Summers — Tue, 31 Mar 2020 10:55:05 +0000

We’re a positive bunch here at Fool UK. Although it’s possible markets could head lower in the near-term as the full economic impact of the coronavirus becomes clear, we’re convinced there’s never been a better period to begin investing, if funds allow.

For most, this will involve opening a Stocks and Shares ISA or Self Invested Personal Pension (SIPP).

Which account is best for me?

The ISA and SIPP are similar and yet quite different. Both accounts allow you to protect any profits you make, or income you receive, through investing from the taxman. The fact you retain this money makes them brilliant investment vehicles for the long term because they allow you to benefit from the magic that’s compound interest.

Both accounts also allow you to invest in a range of assets, from stocks and bonds, to commercial property and gold.

What’s the difference?

There are three big ways in which an ISA and SIPP differ. The first is to do with how much you’re able to save into each account. The ISA allowance in the 2019/20 tax year is £20,000. For the SIPP, it’s 100% of your salary up to £40,000 (although the rules for very high-earners and non-earners are different).

Secondly, saving money into a SIPP generates tax relief. Simply put, this means the government will top up whatever you put into your account with extra cash. For basic rate taxpayers, the relief will be 20%. So, put £80 in your SIPP and you’ll get an extra £20 from the government. Again, the more money you have, the greater the effect of compounding over time.

Another difference between an ISA and SIPP is to do with your ability to access the money you’ve put in each account.

Should you really need to, an ISA allows you to sell your investments and withdraw the cash just like a normal savings account. The snag is that reinvesting the money within the same tax year will count towards your £20,000 limit. You can’t access your SIPP before the age of 55 (rising to 57 in 2028).

It’s also worth pointing out you’ll pay no tax on ISA withdrawals. With a SIPP, 25% will be tax free, but the remainder will be subject to income tax at your marginal rate.

Why open an account now?

Aside from the fact that markets haven’t been this cheap for years, opening a Stocks and Shares ISA or SIPP now is ideal since you can take advantage of your 2019/20 allowance before the end of the tax year (5 April).

This is particularly important for ISA holders since that £20,000 allocation can’t be transferred to next year. Use it or lose it. Unused SIPP allowances from the three previous tax years can be carried forward.

A word of caution

As much as we recommend the ISA and SIPP (and you could open both!), it goes without saying the next few months are likely to be difficult for a lot of people.

For this reason, having an emergency cash fund should still take priority. In ‘normal’ times, this would pay for a broken boiler. In 2020, this is more likely to be used for a period of temporary unemployment.

Clearly, the size of the emergency fund will depend on your personal situation but something in the range of 3-6 months of expenses would be ideal.

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As the coronavirus lockdown continues, I think these small-cap stocks could be worth buying

Paul Summers — Tue, 31 Mar 2020 07:53:35 +0000

As the UK enters its second week of lockdown, we’re all trying to occupy our time as best we can. For me, some of this has been spent looking for businesses that might see demand for their products or services increase during this tricky period.

Here are three minnows that jump out, warranting a closer look and perhaps a tentative first purchase.

Bloomsbury

Books are likely to prove a very popular (and cheap) form of entertainment over the next few weeks. Despite UK shop closures, this could be good news for Harry Potter publisher Bloomsbury (LSE: BMY). I say ‘could’ because, right now, the company said it can’t really estimate the extent to which coronavirus has impacted trading.

Nevertheless, I’d be surprised if it failed to sell a decent amount of hardbacks, paperbacks, ebooks and audiobook downloads over the next few weeks/months.

In addition to the possibility of earnings remaining fairly stable, Bloomsbury’s prudent handling of its finances means it’s entered lockdown in a strong position. Net cash of £31m on the balance sheet is a nice buffer to have.

Considering the shares are down roughly 25% from the highs achieved towards the beginning of 2020, now could prove to be a decent entry point.

888

The decimation of the sporting calendar, including the postponement of Euro 2020 and the Olympics, is having a huge impact on gambling firms, such as William Hill and GVC. One stock that may turn out to be less affected than most is online gaming provider 888 Holdings (LSE: 888).

Last week, the company reported “increased customer activity” around its Casino and Poker products. It’s hoped this will make up for the impact on its Sports division (which made up 16% of revenue last year).

Obviously, no investment is risk-free. If sporting events are disrupted until September, the earnings hit could be in the “high single-digit millions of dollars,” according to the small-cap. So caution is still advised.

Despite this, 888 would be my clear preference in the gambling space. Its online-only business model means it can dodge the fixed costs associated with maintaining a physical estate. The company also reported having almost $100m in cash at the end of 2019.

Boku

A final pick of small-cap firms likely to see a rise in demand is independent carrier commerce company Boku (LSE: BOKU). Put simply, Boku’s technology allows consumers to pay for things using their mobile phone number. Based on recent figures, this is proving increasingly popular.

Last year, the £200m-cap managed to grow revenue by 42% to just over $50m. It also announced its maiden post-tax profit ($400,000 compared to a loss of $4.3m in 2018).

This demand has only got stronger over the last month. It remarked on “significant increases in new users” of its platform. The focus was “particularly for streaming video services and gaming in those countries hardest hit by Covid-19.”

Unsurprisingly, this encouraging news has been reflected in the behaviour of Boku’s share price. It fell in tandem with everything else during March. But it’s now back to where it was at the start of the month.

Things are likely to stay volatile. But risk-tolerant investors may wish to consider taking a stake sooner rather than later.

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How I’d invest £10k in this bear market

Edward Sheldon, CFA — Sat, 28 Mar 2020 08:49:01 +0000

When the stock market crashes, as it has in recent weeks, many investment opportunities emerge for investors who have cash on the sidelines. Those with money to invest today are in a great position.

That said, investing in a bear market has its challenges. Risk management is absolutely crucial. With that in mind, here’s a look at how I’d invest £10k in the stock market today.

How I’d invest £10k

As always, the first thing I’d do is think about structuring my investments tax-efficiently. It goes without saying that the less profit you pay in taxes, and the more you keep for yourself, the better.

One of the easiest ways to invest tax-efficiently in the UK is through a Stocks and Shares ISA. With this account – which has an annual allowance of £20k – all capital gains and income are completely tax-free. So, I’d open a Stocks and Shares ISA with a reputable online broker such as Hargreaves Lansdown or AJ Bell to invest my £10k.

My £10k investment strategy

Now, £10k is not really enough to build a diversified portfolio of individual stocks. To be properly diversified, you need to own at least 20 stocks (preferably more). That’s a lot of money (£200+) spent on trading commissions and stamp duty.

For a £10k investment, I’d invest in a selection of funds instead. With funds, your money is pooled together with the money of other investors and spread out over many different companies, reducing your stock-specific risk. For smaller amounts of money, it’s generally more cost-effective than buying individual shares.

As for which funds I’d invest in, I’d pick a number of global equity funds that invest in companies listed all around the world. I’d also go for funds that have a focus on high-quality companies that should be resilient in the event of a prolonged economic downturn.

One fund that has this kind of focus is Fundsmith Equity. It focuses on robust companies that are financially sound and have attractive long-term growth prospects. Another fund with a focus on quality is the Lindsell Train Global Equity fund. Both of these funds have outstanding long-term performance track records.

In the exchange-traded fund (ETF) space, one fund I’d consider is the iShares Edge MSCI World Quality Factor UCITS ETF. This is a low-cost tracker fund that focuses on companies that demonstrate strong and stable earnings and have low debt – a solid strategy in these uncertain times.

Risk management

Finally, I wouldn’t invest the £10k all at once. Given the enormous amount of uncertainty the world is facing right now, there’s a chance that stocks could fall further in the near term.

What I would do is drip-feed £2.5k into my portfolio of funds every month for the next four months. That way, if stocks were to fall another 20% to 30% in the months ahead, I’d be able to capitalise.

So, that’s how I would personally invest £10k in this market. If you’re looking for more bear market investment ideas, you’ll find plenty right here at The Motley Fool.

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Edward Sheldon owns shares in Hargreaves Lansdown. The Motley Fool UK has recommended Hargreaves Lansdown. 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.

FTSE 100 investors: Here’s one thing I’d be careful of in this bear market

Edward Sheldon, CFA — Thu, 26 Mar 2020 14:56:45 +0000

Bear markets can present amazing opportunities for long-term investors. Those who buy stocks while the market is down tend to be rewarded in the long run.

That said, investing during a bear market is not as straightforward as investing during a bull market. If you’re thinking of buying stocks in the current bear market, there’s one thing you should know.

Beware of bear traps

It’s no secret that in a bear market, the general trend of the stock market is down. What many investors don’t realise, however, is that stocks don’t fall in a straight line. Every now and then, the stock market will bounce a little (as selling activity temporarily weakens), before resuming its downward trend. This ‘false reversal’ pattern is called a ‘bear trap’, and it can be dangerous for investors.

The reason bear traps are dangerous is that they lure investors back into the market at higher prices, right before the next down-leg of the bear market. Stocks rise a little, and investors think the worst is over. As fear is replaced by greed, they scramble to get back into the market. Then, the market suddenly takes another dive and those who bought at higher prices get crushed.

This is summed up well by AJ Bell’s investment director Russ Mould, who said recently: “Analysis of the four previous downturns in 1987, 1998, 2000 – 2003 and 2007 – 2009 show that those bear markets were actually littered with sharp rallies which cruelly turned out to be nothing more than bear traps for the unwary, who were tempted into a ‘buy-on-the-dip’ strategy, only to quickly find themselves in trouble.”

FTSE 100 bear trap?

Looking at the FTSE 100‘s movements in the last few days, my hunch is that we may be seeing a bear trap right now. The coronavirus situation is far from over, yet the FTSE has rebounded roughly 15%. That kind of bounce seems a little premature to me. I would not be surprised to see another down-leg from here before the market generates a sustained recovery.

As Mould says: “There remains the risk that any such advance proves fairly temporary should news on the viral outbreak continue to get worse and policy measures require a longer lockdown – and potentially deeper hit to global economic activity – than currently hoped.”

Mould also points out that six of the FTSE 100’s 10 single largest percentage daily gains in recent times came between September and December 2008 (during the Financial Crisis). Yet the index didn’t bottom until March 2009 – something to keep in mind after this week’s huge jump.

Investing in a bear market

So, what’s the best way to invest in bear markets?

Well, one piece of advice is to keep your emotions in check. Don’t let fear and greed drive your investment decisions. If the market suddenly rallies hard, don’t feel that you need to load up on stocks at higher prices to avoid missing out on gains.

It’s also a good idea to refrain from investing large lump sums at once. Drip-feeding money into the market slowly at regular intervals will enable you to capitalise if stocks fall further.

Finally, I think it’s smarter to buy stocks on the big down days instead of the big up days. You can still lose money this way, of course, but by buying shares at lower prices, your portfolio will recover faster.

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Views expressed 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.

Why dividends are a powerful force in a bear market

Edward Sheldon, CFA — Mon, 23 Mar 2020 12:05:59 +0000

Dividends are a powerful force in investing at the best of times. They make up a large proportion of overall returns from the stock market. They can also play a key role when it comes to compounding returns (earning a return on past returns) due to the fact they can be reinvested.

In a bear market, however, the benefits of dividends are magnified. Here, I’ll explain why dividends can have a huge impact on investment portfolio returns when share prices are falling.

Return accelerator

One of the main benefits of receiving dividends is that the income can be used to buy more shares. In a bear market, this is a huge advantage as you have the opportunity to buy more shares at lower prices. If you reinvest your dividends while share prices are low, your portfolio is likely to receive a big boost when share prices recover. As finance professor Jeremy Siegel explains: “Reinvesting dividends turns into a ‘return accelerator’ once stock prices turn up.”

Looking at my own dividend portfolio, I’m excited. I’ll be receiving big dividend payments from a number of companies – including oil major Royal Dutch Shell, logistics specialist Tritax Big Box, and tobacco giant Imperial Brands – in the next week or so. I’ll be looking to reinvest this cash in stocks while share prices are low. That means when the market recovers, my portfolio receives an added ‘return accelerator’ boost.

Positive returns

Another big advantage of dividends in bear markets is they support overall portfolio returns. While the returns from share prices may be negative, the returns from dividends will still be positive (assuming you own high-quality, dividend-paying companies that don’t stop paying dividends). This means the dividends will offset the capital losses, supporting overall performance.

It’s also worth noting that, in a bear market, those who rely on dividends for income (i.e. those in retirement) are likely to be much better placed than those who rely on selling shares at regular intervals for cash flow. Those who are receiving a regular stream of dividends don’t need to worry about selling shares at low prices and locking in losses.

Portfolio protection

Finally, stocks that pay reliable dividends can hold up well when share prices are falling. Take consumer goods champion Unilever for example. While the FTSE 100 index has fallen about 30% over the last month, ULVR has fallen less than 10%. That’s a huge outperformance.

Health and hygiene specialist Reckitt Benckiser is another good example. Over the last month, its share price has also fallen less than 10%, meaning it has outperformed the FTSE 100 by a significant margin.

Of course, not every dividend stock has outperformed like this. But many high-quality dividend payers have held up quite well. This means those who own a portfolio of high-quality dividend payers may not have experienced the same kind of losses as those investing in more speculative growth stocks.

Overall, dividends are a very powerful force during bear markets. When share prices are falling, dividends really shine.

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Edward Sheldon owns shares in Unilever, Reckitt Benckiser, Royal Dutch Shell, Imperial Brands and Tritax Big Box. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Imperial Brands and Tritax Big Box REIT. 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.

My simple checklist for investing during the 2020 market crash

Paul Summers — Mon, 23 Mar 2020 11:33:16 +0000

For those with a long investing horizon, learning to swim against the market tide now could result in massive gains later down the line. With this in mind, here’s a four-point checklist I’ll be using to at least narrow my search for the best stocks.

1. Balance sheet strength

There’s a reason why this criterion takes priority over all others. With all sorts of businesses likely to suffer over the next few months (possibly years), it’s those with poor balance sheets that are most vulnerable.

At times like these, Fools need to avoid companies with high operational and financial leverage. In other words, steer clear of those with big fixed costs (relative to their revenues) and those needing to raise capital through loans and other financing options. On the flip side, companies with no debt and loads of cash are ideal.

One way to get a handle on the financial robustness of a company is to call up the latest results from its website. This information might not be completely up to date but it’s as good a place as any to start.

2. Competitive advantage

Even if a company manages to make it through the coronavirus crisis, it’s unlikely to thrive in the future if it lacks some sort of competitive advantage or, as Warren Buffett call is, an ‘economic moat‘.

Moats can be wide or narrow. I’d recommend trying to find the former. Evidence of a wide economic moat is when rivals struggle to break down a company’s market share. For some, this will be ‘intangible assets’ such as strong brands. For others, it will be innovative technology, or cheap access to raw materials.

A narrow moat, by contrast, is one that only protects a business for a relatively short period of time because the barriers to entering its market are low.

3. Proven management

Knowing the companies I’m a part-owner of are led by prudent management teams gives me confidence that they stand a better chance than most of weathering the economic storm we face. For this reason, I think it’s important to check the track records of those in charge before investing.

The only thing better than highly competent management is highly competent management owning a decent slug of shares. Having their own wealth invested in the business should ensure their interests are aligned with the rest of us.

While significant ownership is often the case with smaller companies, it’s less common with established stock market juggernauts. For this reason, I wouldn’t automatically dismiss investing in market minnows at the current time.

4. Reasonable price

You may think that nabbing a bargain is the most important factor to consider, particularly during the crisis in which we find ourselves. Since there are many companies out there trading on temptingly-low valuations that may actually struggle to survive, however, I respectfully disagree. Stock pickers need to be more selective than ever.

Like most things in life, you get what you pay for. As fund manager Terry Smith of Fundsmith regularly remarks, it’s what businesses actually do over many years that really matters, not the brilliance of your timing. Those that grow and reinvest their earnings at a high rate of return will be the ones to thrive.

Don’t compromise quality for price.

The post My simple checklist for investing during the 2020 market crash appeared first on The Twelfth Magpie.

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