It hasn’t been a great year for the stock market. The reference FTSE100 the index has fallen 7% this year and 4% over the past 12 months. The FTSE250 the index has fallen more sharply, losing 25% of its value over the past year.
So is it time for me to invest in anticipation of a possible stock market rally in November?
A tough winter ahead
In fact, I’ve been investing recently, buying a range of UK stocks for my portfolio last month. But that’s not because I expect a stock market rally in November.
No one ever knows for sure what will happen next in the stock market. Recovery is therefore possible. There are a number of factors that could support this, from increased political stability in the UK to a weaker pound attracting bargain hunters to parts of the UK market that currently appear to be offering good value- price.
However, I see a number of reasons why the stock market may not rally in November – and may even continue to decline. The global economy continues to struggle and inflation is threatening business profitability, not just in the UK but in many markets.
But, as I said above, I bought. Given the risks I see, why?
The answer lies in a phrase I used above. I think some corners of the UK stock market currently seem to offer good value. When the stock market drops, what happens is that the average price of hundreds of companies goes down. But that doesn’t mean that all individual stocks lose value.
On top of that, negative investor sentiment towards the market in general can depress the price of companies that I consider to be big companies. As a proponent of long-term investing, the opportunity to buy stocks of large companies at an attractive price appeals to me.
A falling stock market can be an opportunity
So what am I looking for when making such investments? Basically, I’m looking for what I’m always looking for as an investor. Namely, a significant mismatch in my favor between a company’s current valuation and what I view as its long-term value.
To do this, I examine what I believe to be the long-term prospects for the business. Does it operate in a high-demand market that looks set to continue? Does he have an advantage over his rivals?
Also, is it trading at an attractive price relative to its long-term prospects? An example of a stock I recently purchased for my portfolio that I believe meets these criteria is Victorian plumbing. It has already fallen much more sharply than the stock market, losing 66% of its value over the past year. But it has clean cash, trades on a price-earnings ratio of just 5, and has a solid position in its market.
There is a risk that the slowdown in real estate sales will hurt revenues and profits. But I think the short-term price decline is exaggerated relative to the company’s long-term outlook and presents my portfolio with a buying opportunity.
Whatever the stock market does in November, I’ll be looking for more such opportunities to add what I think are great companies to my portfolio at an attractive price.
The post Will the stock market recover in November? first appeared on The Motley Fool UK.
C Ruane holds positions within Victorian Plumbing Group plc. The Motley Fool UK has no position in any of the stocks mentioned. The opinions expressed on the companies mentioned in this article are those of the author and may therefore differ from the official recommendations we give in our subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that considering a wide range of information makes us better investors.
Motley Fool United Kingdom 2022