I think there’s potential for UK stocks to recover on two levels. Firstly, the ongoing clawback from the pandemic crash of 2020 has still to fully play out. And secondly, we’ve seen a lot of individual stocks decline — or ‘correct’ — over recent days and weeks.
The performance of UK stocks varies
But watching the lead FTSE 100 index in the UK doesn’t tell the whole story. Compared to the swings some stocks have been through, the moves of the FTSE 100 have been modest. As is often the case, the devil (or opportunity) is in the detail. Within all the major indices, there are variations in performance between individual stocks. And thinking beyond mere recovery, I reckon there’s a big longer-term opportunity.
Many underlying businesses have decent prospects to grow. And as their profits increase, there’ll likely be upward pressure on share prices and shareholder dividend payments to reflect the progress.
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But one of the dangers for investors is getting valuation sums wrong. If I pay too much for a stock, decent underlying business performance can lead to zero returns for me as an investor. Or I could even lose money on a stock over time, even as the business goes from strength to strength. Indeed, over-valuations tend to correct eventually. And that often means a stagnant share price at best, or a falling stock if the over-valuation problem is severe.
And that’s why market setbacks, corrections and bear moves can throw up opportunities. Often, weaker markets cut over-valuations down to size. And there’s a better chance of finding good, growing businesses selling at better prices. That’s why the great investor Warren Buffett talks about loading up with stocks when markets are crashing or when everyone seems to be worried about something.
Quality is king
But key to the approach is to focus on the quality of underlying enterprises. I want to buy shares in strong businesses with resilience against the ups and downs of the wider economy. That’s why I’m always searching for them to add to my watch list. And right now, several UK stocks appeal to me because of their quality, forward-looking prospects and valuations.
For example, I’m keen on paper-based packaging supplier DS Smith. The business has a long growth runway and a tailwind blowing from the opportunities arising from the e-commerce sector. Of course, the company isn’t the only player and may not be able to differentiate its products and services much from those provided by other firms. But growth is on the directors’ agenda. And the business has been trading well.
I also like the look of information technology services and infrastructure provider Computacenter. The company has a long, multi-year record of steady growth. And the directors said in September they are “confident” the firm’s markets will remain “buoyant” for the “foreseeable future”. Nevertheless, the forward estimate for growth in earnings in 2022 is modest. It’s possible the valuation may need to contract further, which could mean more declines in the share price.
Nevertheless, I’m inclined to embrace the risks and buy these two stocks to hold for the long term. However, I’d carry out thorough research before doing so.
