A Stocks and Shares ISA is a great tool for an investor like myself. It allows me to invest up to £20,000 per year into stocks without the fear of future capital gains tax. So when I get dividends or sell a stock (hopefully) for a profit in the coming years, any profit will be mine to keep. When looking at the best stocks to buy now, they should be able to generate me high returns, so the ISA is a handy tool. But which stocks should I be buying?
Picking the best stocks by looking at the past
I could consider past returns when looking to find the best stocks to buy now. For example, over one week, the Tesco share price is the top performer. Investors have bumped up the share price with thoughts of a potential private equity bid in a similar manner to Morrisons. Good Q1 results are also helping.
Yet this is over a short time period and so I’m cautious. My ISA is for stocks to hold for years so I want to look at a longer timeline of historical performance. What have been the best performing FTSE 100 stocks over the past two years?
The top two companies are Entain and Royal Mail. Both companies have delivered very strong returns over this longer time period. In fact, the Entain share price is up over 200%.
The reason I’d favour adding both companies to my ISA as the best stocks to buy now is their track record. Clearly, both firms have got the right strategy and have been heading in the right direction. Hopefully this sentiment can continue, enabling the share prices to rise even further.
Buying undervalued stocks now
Another point I’m looking at is valuation. After all, past share price returns are a factor, but how do they relate to earnings? If the current share price is low relative to earnings per share, this could represent a top share to buy now. In theory, the share price should rise over time to reflect a fair P/E ratio level.
I can look at the P/E ratio relative to the specific industry, or simply as a general tool. In a general sense, a company with a P/E ratio of less than 10 could be a buying opportunity in my opinion. To this end, some of the best stocks in this filter include Taylor Wimpey and Legal & General with P/E ratios of 7.99 and 8.6 respectively.
As with many financial equations, just using the P/E ratio alone to make investment decisions won’t help me. It can sometimes mean investors misconstrue the actual state of the business. Yet if I combine a good historical share price performance along with a relatively low P/E ratio, I think I can find some great stocks to buy now for my ISA.