The March 2020 stock market crash was horrible. And the rebound was quite impressive. But now the markets are volatile because of the second wave of coronavirus infections.
So, what are the best FTSE 100 shares to buy now?
Contrarian investing
My colleague Matthew Dumigan took a rather contrarian approach to investing, which I like. He is bullish on stocks like Cineworld, easyJet, Carnival, and Taylor Wimpey. While I like contrarian investing, for me, these shares are too high-risk/high-reward. Tourist companies, airlines, housebuilders, and cinemas are heavily impacted by Covid-19. At the same time, if they survive the pandemic, they will flourish. But the problem is that we don’t know when it will be over and how much time it’ll take for these businesses to recover.
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Best FTSE 100 shares to buy
So, a more defensive investor would probably be better off looking elsewhere. Very well, but which FTSE 100 shares should investors be interested in? In my view, some of the easy-to-understand businesses that operate properly in spite of Covid-19 are better alternatives.
First, an investor has to think about what consumers need, regardless of the economic cycle and the pandemic. Consumers still need to eat and drink. Many are still probably unwilling to go to restaurants and cafes to do so. But they still go to supermarkets and order food and drinks home. So, classic “blue chips” from the nutritional sector still manage to make a profit. These seem to be Tesco, Coca-Cola, Diageo, and Unilever. Unilever also produces essential hygiene items for which consumers are also unwilling to cut their spending.
Invest in momentum shares?
I’d also like to talk about fashionable momentum stocks. What are they? Well, these equities seem to be the best FTSE 100 shares to buy now. They have dramatically increased their earnings the past quarter or the last 12 months. Two examples immediately come to mind. Food delivery services like Just Eat Takeaway and Ocado have become extremely popular during the pandemic. However, many investors forget that before Covid-19, these companies were not profitable. I don’t know when the pandemic will finally be over. But there is a risk that when it is over, the demand for food delivery services will fall, thus crashing these two companies’ business.
What to do in a stock market crash?
There is plenty of volatility now. But it is important to try to buy low and avoid panicking when stock market indexes crash. I’ve mentioned buying reliable blue chips, but it’s essential to avoid overpaying for a stock. In order to do so, you have to check its multipliers – its price-to-earnings (P/E) and price-to-book (P/B) ratios. If they are high, then a stock is most probably overvalued. A good example of this is AstraZeneca. It might seem that a large pharmaceutical company will always benefit from situations like this. But AstraZeneca’s P/E ratio of over 100 is extremely high. Benjamin Graham, the father of value investing, disliked a P/E ratio of over 20. Imagine how he would react to a P/E of over 100!
So, choose sectors carefully but look at the accounting multipliers too. Some other qualitative information like the recent corporate news is also needed to make sound decisions.
