It has not been a great year for the stock market. The benchmark FTSE 100 index has fallen 7% this year and by 4% over the past 12 months. The FTSE 250 index has tumbled more steeply, losing 25% of its value over the past year.
So could now be the time for me to invest ahead of a possible stock market recovery in November?
Tough winter ahead
Actually, I have been investing lately, buying a range of UK shares for my portfolio just last month. But that is not because I expect a stock market recovery in November.
No-one ever knows for sure what will happen next in the stock market. So a recovery is possible. There are a number of factors that could support this, from increased political stability in the UK to a weakening pound attracting bargain hunters to some corners of the UK market that currently look like they offer good value.
However, I see a number of reasons why the stock market may well not recover in November – and indeed, could keep falling. The global economy continues to struggle and inflation threatens corporate profitability, not only in the UK but in many markets.
Bargain hunting
But, as I said above, I have been buying. 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 look like they offer good value. When the stock market falls, what happens is that the average price of hundreds of companies declines. But that does not mean all individual shares lose value.
On top of that, negative investor sentiment towards the market in general can drive down the price of companies I see as great businesses. As a believer in long-term investing, the opportunity to buy shares in great companies at an attractive price is compelling to me.
A falling stock market can be an opportunity
So what am I looking for when I make such investments? Essentially, I am looking for what I always look for as an investor. Namely, a significant mismatch in my favour between a company’s valuation today and what I see as its long-term worth.
To do that, I look at what I think are the company’s long-term prospects. Does it operate in a market with strong demand that seems likely to endure? Does it possess some advantage over rivals?
On top of that, is it trading at an attractive price relative to its long-term prospects? An example of a share I have been buying for my portfolio lately that I think meets those criteria is Victorian Plumbing. It has already fallen far more steeply than the stock market, losing 66% of its value in the past year. But it has net cash, trades on a price-to-earnings ratio of just 5, and a strong position in its market.
There is a risk slowing property sales could hurt revenues and profits. But I think the short-term price fall is overdone, relative to the company’s long-term prospects and offers my portfolio a buying opportunity.
Whatever the stock market does in November, I will be looking for more such chances to add what I think are great companies to my portfolio at an attractive price.