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.
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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.
