The UK economy is currently going through multiple challenges. With investors feeling bearish, I’m trying to look ahead and search for the best shares I can buy for when the market starts to recover.
With rampant inflation, tepid growth and a cost-of-living crisis, there’s a distinct lack of positive news around. But opportunities can often be found in tough times.
A contrarian investor might actively look for cheap, undervalued and unloved stocks. By the time the next bull market arrives, these shares could potentially multiply in value.
Buying quality stocks
But what should focus on to find the best shares to buy today? I’d look for high-quality stocks that are trading at beaten-down prices.
In particular, I might search for previous stock market winners that have suffered recent setbacks. Markets flow in cycles of boom and bust. I’d want to prepare for the next boom by taking advantage of any temporary issues.
Bear in mind that although previous bear markets have ended relatively swiftly, there’s no guarantee that will be the case this time. Some bear markets have dragged on for several years.
The criteria
That’s why I’m only looking for shares to buy that fulfil my criteria. Companies that display high and consistent levels of profitability are at the top of my wishlist. Specifically, I’d look for a return on capital employed of over 20%.
Next, I’d like to see a double-digit profit margin and ideally some steady earnings growth.
Respected investor Warren Buffett has popularised the idea of a ‘business moat’. It refers to a sustainable competitive advantage and it’s a key factor for a high-quality business, in my opinion. It can sometimes be a strong brand, a patent or unique technology, for instance.
The best shares to buy
Looking at my criteria, there are several FTSE 100 shares that I’d consider buying right now. My list includes JD Sports Fashion, Howden Joinery, Spirax-Sarco Engineering, B&M and Rightmove.
On average, these five shares offer a return on capital employed of 59%, and a profit margin of 29%. They’ve also shown annualised earnings growth of 17% over the past five years.
That looks impressive to me.
If I’d bought these shares one year ago, I’d be looking at an average loss of 30%. That said, another way I can look at it is that they’re now trading at an appealing 30% discount to a year ago.
Also, before the pandemic in 2020 and the energy crisis in 2022, these five shares performed relatively well. Between 2015 and 2020, the stocks returned a whopping 25% a year in share price and dividends.
Much has changed since then and there’s no guarantee they will be able to replicate that performance.
That said, I’m confident that one day, a bull market will return. And I reckon these quality shares could shine again. That’s why I’d buy all five for my long-term portfolio.