The coronavirus crisis certainly threw a curveball at the markets. Just about all shares plunged when the crisis first arrived and we saw the stock market crash in the spring.
Since then, I’ve read numerous articles and opinions about the shape of economic recovery we’ll likely see. Will it prove in the end to be v-shaped, tick-shaped, u-shaped, w-shaped or k-shaped as Edward Sheldon expects?
Will this kind of recovery follow the stock market crash?
Of all the possibilities, I find Edward’s suggestion to be the most convincing. He reckons some businesses and sectors will likely recover strongly while others will continue to weaken. And those operational conditions will drive various shares.
Indeed, I think we’re already beginning to see evidence of a K-shaped outcome emerging. For example, bank shares, such as Lloyds, Barclays, NatWest and HSBC, are behaving as if they’ve been holed below the waterline. And we’re seeing a lacklustre performance from some housebuilder stocks, such as Vistry, Redrow and Barratt Developments. Meanwhile, the world has changed for airline companies, such as EasyJet and International Consolidated Airlines – perhaps forever.
On the upside, we’ve seen strong performances since the spring from companies such as information technology infrastructure services company Computacenter. There’s also been good momentum in the business with recruitment company CPL Resources. And a strong bounce-back from plumbing and heating products distributor Ferguson. Meanwhile, the share price of veterinary pharmaceutical company Dechra Pharmaceuticals has just broken into new higher ground reflecting strong underlying momentum in the business.
And those are just a handful of many stocks on the London market that have been doing well since the spring. When it comes to aiming for a million, I’d confine my search to such strong-looking, quality businesses rather than trying to pick a bottom for weak shares backed by low-quality businesses. So banks, travel companies and other damaged cyclicals are off the agenda for me.
Strength rather than weakness
If the k-shaped recovery theory proves to be correct, it’s a stock-pickers’ market more than ever right now. So I’d pick shares to hold for the long term, such as Computacenter, which recently released a bullish trading update. The company has proved to be a consistent growth winner over the past decade and I reckon it has every chance of performing well in the coming 10-year period.
I also like the strength of trading in Dechra Pharmaceuticals and believe the share could do well over the long term. My final pick is plumbing and heating products distributor Ferguson, which has demonstrated the resilience of its business in the face of Covid-19.
But those aren’t the only shares I’d be happy to buy right now and hold for the long term. As a general principle though, I’d go with strength rather than weakness, so I’m shopping for shares moving in line with the top half of the K in the K-shaped recovery.