Buying the best UK shares before the next stock market rally could enable investors to reap impressive returns in the long run. While the FTSE 100 index has remained relatively flat throughout the ongoing bout of volatility, many of its constituents haven’t fared so well.
Industry leaders and rising enterprises alike have been sold off in recent months. Even firms with strong financial standing haven’t been spared, courtesy of panic-selling investors.
However, for patient investors, this storm has created countless buying opportunities for top-notch stocks at bargain prices. The question now becomes, how can I find them to boost my portfolio’s long-term performance?
Finding opportunities before the stock market rally
Technology is one of the industries to have been hit hardest during this correction. With most of these companies dependent on external capital, their once sky-high valuations have come crashing down to Earth. Why? Because access to funding is quickly drying up now that interest rates are rising.
With the sector subject to ever-weakening investor sentiment, some of these stocks are now trading up to 80% lower than a year ago. The unprofitable firms have been hit the hardest. Yet those with intelligent leadership issued new shares while their valuation remained lofty last year.
As such, many have enormous piles of cash to keep the lights on. And the more established enterprises are already self-sustaining, despite what the volatility would suggest.
Consequently, some of the best long-term bargains today could be in the tech industry or other sectors that’s lost favour with investors this year.
Obviously, the current economic environment is going to create some headwinds. And while these are ultimately short-term problems, they could lead to significant disruptions in the coming months. But once the stock market rally begins, these sectors could be looking at another decade of stellar growth. And buying while shares are still cheap is a proven recipe for substantial returns.
Buying dirt-cheap UK shares for the long term
While short-term disruptions are of little interest to long-term investors, they can significantly impact businesses.
To profit from the next stock market rally, the shares I buy from unpopular UK industries need to still be around once the chaos has settled. And in many cases, some companies have been sold off for good reasons.
Focusing solely on firms with robust balance sheets is likely a sensible move to mitigate this risk. However, additional external factors may be at play that aren’t immediately obvious. For example, a competitor could have quietly launched a new product that makes an entire business model obsolete.
Given the difficulty of spotting these game-changing events, especially during a time when everyone is focused on macroeconomic conditions, diversification is now even more critical than before. By not putting all my eggs in one basket, I can still capitalise on the next stock market rally while keeping risk in check.