A wide range of UK shares are currently unpopular among investors. This may be because they face challenging operating conditions that lead to disappointing financial performances in the current year.
However, they could prove to be profitable investments over the long run. Their low prices may indicate they offer wide margins of safety that can translate into capital growth as the economy recovers.
Therefore, they may be worth buying ahead of popular assets such as gold and Bitcoin. The precious metal and Bitcoin have high prices that may mean they lack further capital growth prospects.
Identifying bargain UK shares
Of course, not all cheap UK shares are necessarily bargains. In some cases, they may warrant low prices due to the high risks they face. For example, they may have a weak balance sheet that contains large amounts of debt. This may reduce their chances of surviving a weak economic period. Similarly, they may have business models that are more difficult to adapt to changing consumer tastes.
However, many FTSE 100 and FTSE 250 stocks currently have valuations that don’t reflect their financial positions or their long-term outlooks. Some companies with clear competitive advantages over their peers and sufficient cash to overcome near-term risks are trading at low price levels because of short-term uncertainty. Over time, an improving economic performance may lift their financial prospects and lead to high capital returns for investors.
Investing money in gold and Bitcoin
Buying bargain UK shares may not feel like the right move at present. Risks such as Brexit and coronavirus may make assets such as gold seem more attractive. Its defensive status could help to protect your portfolio from further short-term challenges that have a negative impact on FTSE 100 and FTSE 250 shares.
Similarly, Bitcoin’s rising price may make it seem more appealing than cheap stocks. Sentiment towards the virtual currency has gained momentum in recent months so that it now trades around 50% higher than it did at the start of the year.
However, gold and Bitcoin’s high prices may mean they have more limited scope for capital returns compared to UK shares. As such, over the long term, a portfolio of undervalued FTSE 100 and FTSE 250 stocks could outperform Bitcoin and gold.
A long-term view
The past performance of the economy shows that positive GDP growth has always followed a recession. Equally, UK shares have always posted new record highs after their bear markets. As such, the best time to buy stocks is often soon after a stock market crash when risks are high and undervalued shares are unpopular.
This strategy may not produce strong returns in the short run. Bitcoin and gold may even outperform the stock market over the coming months. But long-term investors may generate higher capital growth from bargain stocks as the economy recovers, operating conditions improve and investor sentiment gains momentum.
The post Forget Bitcoin and gold! I’d invest money in bargain UK shares today appeared first on The Motley Fool UK.
Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2020