The recent stock market rally has caused the share prices of many UK companies to surge higher. In some cases, this may be merited. But in others, it could mean relatively unattractive companies are trading on premium valuations.
Those valuations may have been caused by over-optimism among UK investors. Avoiding a similar mindset, as well as the idea of holding a limited number of overpriced stocks, could be a means of finding and capitalising on the best shares to buy now.
Paying too much after the stock market rally
The stock market rally has pushed the valuations of many UK shares to high levels. For example, the FTSE 100 has gained over 25% since its lowest level in March 2020. However, some sectors and companies have surged much higher than the wider market. This could mean they offer limited future gains. That’s because they trade at, or above, their intrinsic values.
Clearly, some companies are worthy of their higher valuations. For example, they may be delivering rising profits that can be sustained in the coming years. However, other stocks may now be overpriced based on their financial positions, economic moats and future prospects.
Therefore, avoiding such highly-valued companies could make it easier to find the best shares to buy now. Certainly in terms of looking at those stocks that have greater capital appreciation potential following the recent stock market rally.
Becoming too optimistic
The recent stock market rally also appears to have caused increasing optimism among investors. Indeed, there are grounds to be upbeat about the outlook for the stock market. For example, the vaccine rollout seems to be progressing well. Forecasts for economic growth are also buoyant.
However, there are also many risks facing investors that may not currently be at the forefront of their minds. They include, but are not limited to, weak consumer sentiment and high unemployment. These may have a negative impact on the prospects for many businesses.
Avoiding an overly-optimistic mindset when investing money after the recent stock market rally could help to unearth the best shares to buy now. It may lead to a more balanced viewpoint that enables an investor to purchase companies with lower risks and higher return potential.
Concentrating on too few stocks
The stock market rally can lead to greater risk-taking among investors. For example, they may decide that building a diverse portfolio is unnecessary, since the stock market is likely to move higher after its recent gains.
However, no company can guarantee capital growth for any investor. Unforeseen problems can impact the performance of even what appear to be the best shares to buy now. Furthermore, a diverse portfolio can offer a broader range of growth opportunities that leads to a more resilient and higher rate of growth versus a concentrated portfolio.