Finding the best shares to buy in the current stock market rally isn’t easy. Some companies have flown over the past year and are now starting to look overvalued. Nobody wants to jump on board a momentum stock just as it runs out of steam.
Even though the FTSE 100 now trades above 7,100, I still reckon it’s possible to pinpoint a spread of the best shares to buy today, without overpaying. I’d look for companies with healthy long-term growth prospects throughout the investment cycle.
I’d start by making a beeline for unpopular sectors. These may have fallen out of favour, for all sorts of reasons, but could swing back as bargain-seekers spot an overlooked opportunity.
Is Glaxo one of the best shares to buy?
Ironically, given we’re still in the middle of a pandemic, pharmaceutical stocks appear to be out of favour. GlaxoSmithKline now trades at a bargain 11.6 times earnings, but yields a thumping 5.92%. To me, it looks like one of the best shares to buy on the FTSE 100, provided you can hold long-term and are willing to be patient. I really like buying high-quality companies trading at discounted prices.
We’re looking for the best shares to buy, so I favour companies with strong, healthy balance sheets and low net debt. I also look for hidden nasties, such as hefty company pension liabilities, which weigh down companies such as BT Group, BAE Systems and Centrica.
Sectors swing in and out of favour. Last year, banks and oil companies suffered as the economy floundered and people stopped travelling. However, they’ve been two of the best performers last year as vaccines hopes rise. But bargains are harder to find. For instance, the Lloyds Banking Group share price is up two thirds in just six months.
Investors also have to decide how much risk they’re willing to bear. The Rolls-Royce share price has been hit hard by the pandemic. That could make it one of the best FTSE 100 shares to buy today, but its troubles could worsen if the world doesn’t resume flying soon.
There are still bargains on this FTSE 100
While I look at valuations such as the price/earnings ratio, I’d handle with care. A stock may look cheap, but it could face hidden challenges, such as a new competitor on the block. It’s also worth seeing whether they’ve a wide economic moat, such as a strong brand or product, to cement their market position.