While many UK shares have made gains in recent months, there could still be scope for further growth in a long-term stock market recovery. Although this is never guaranteed, history suggests that over the long term, indexes such as the FTSE 100 could make further gains from their present level.
Through buying businesses with sound financials and solid growth strategies while they trade at low prices, it may be possible to earn attractive returns in the coming years.
Buying UK shares with sound finances
Although a stock market recovery may take place over the long run, many UK shares face very tough operating conditions. For example, unemployment is unfortunately continuing to rise, while a lockdown is causing many industries to experience unprecedented falls in sales.
As such, buying companies that have low levels of debt, large amounts of cash and access to liquidity could be a sound move for me. They may have a greater chance of surviving the difficulties that could be ahead in the coming months, or even years. They may also be able to sustain a period of weaker financial performance for longer than their sector peers. This could ultimately allow them to increase market share and generate higher returns in the long run.
Focusing on growth
Due to the large amount of change that is ongoing in many industries, I think buying UK shares that have sound strategies could be a shrewd move. For example, they may have plans to adapt their business models to changing consumer tastes. Or, they may be in the process of making acquisitions to strengthen their exposure to faster-growing parts of an industry.
As such, it may be worthwhile for me to assess a company’s strategy through analysing management commentary in recent updates. This process could make it easier to gauge how successful a business may be in the long run, as well as in determining its ability to survive what could be a challenging year.
Obtaining a margin of safety
Buying UK shares that have wide margins of safety could be a means of reducing risk and increasing potential rewards. A margin of safety is where a company trades at a discount to its intrinsic value, or real worth. Clearly, every investor will have a different view on what price a company’s shares should be. However, the process itself of buying undervalued shares could mean a more rewarding long-term future.
With many industries so far having failed to fully bounce back from the 2020 market crash, they may offer capital appreciation potential in a stock market recovery. Buying a diverse range of them could reduce risk further through lowering the impact of one company’s poor performance on a portfolio. This may lead to a more resilient portfolio performance in the coming years.