The past year has been volatile for stocks because of the pandemic. And many shares have bounced back the lows of last spring. But some share prices remain weak because their underlying businesses have been affected more by the lockdowns.
But investors brave enough to buy stocks near their lows last year will have done well in many cases. However, now that vaccines are rolling out, I think there’s an opportunity to buy stocks to hold for the long term. And we could see a general bull market through 2021.
Looking for the best shares
I’d aim to fill my Stocks and Shares ISA with investments backed by high-quality underlying businesses. Many great companies listed in London have the potential to thrive in the coming years. And as an investor in their shares, I’d expect to benefit from an increasing dividend income stream and capital gains from a rising share price.
Of course, those benefits are not guaranteed. Investing in shares always carries an element of risk. For example, the underlying businesses may not perform as expected and their share prices could fall causing me to lose money. But I’d aim to reduce the risk by researching my investments and focusing on quality and value indicators.
For example, I like the look of telecoms giant Vodafone. The business enjoys the advantage of owning infrastructure networks that are hard for competitors to replicate. But three years ago, the valuation was high, making the stock look expensive. However, the share price eased back since then and now the stock looks like better value to me.
Vodafone has a decent record of cash flow generation. And City analysts expect the firm’s earnings to rebound in the trading year to March 2022. There’s a fat dividend yield above 5% and potential for the business to grow. However, one area of risk is that the company has a lot of debt, so I’d aim to keep an eye on that.
Growth potential and risks
I’m also keen on insurance and investments company Aviva and groundworks and geotechnical solutions specialist Keller. Both firms are paying chunky shareholder dividends right now and I reckon they have the potential to grow their operations in the years ahead. However, those two enterprises operate in cyclical sectors. And if I’ve misjudged my analysis, their businesses may underperform going forward and I could lose money on my investments.
Meanwhile, fitted kitchen and joinery manufacturer Howden Joinery has robust forward estimates for earnings. But the valuation looks rich and the dividend yield is below 2%. Despite the valuation risk, I like the quality indicators for this business and believe the company has earned its higher rating. I think the business could have a bright future. But the biggest risk to my investment would be that my assumptions could prove to be wrong.
Finally, I’m keen on private label household and personal care products maker McBride. The valuation looks modest and I reckon the business has the potential to grow. But the company is small and has a history of volatile earnings. The big risk is that going forward, earnings could fall again. Nevertheless, the shares tempt me.