Stock market investors have had a lot to deal with in 2019, with slowing global growth, a US-China trade war, Brexit, and a general election, all combining to create an uncertain outlook.
However, the year also presented some unique buying opportunities, for those investors prepared to ignore the external noise and selectively invest in high-quality companies.
Since I started writing for the Motley Fool in July of this year, I’ve recommended 17 stocks that I thought would do well in the future. These recommendations were mainly based on my perception of the quality of company earnings on the one hand, and the price of the shares on the other.
At the time of writing, this portfolio would have increased in value by over 10% (if investments were equal-weighted and made on the day of the recommendation). And that doesn’t even include dividends.
The same amounts invested in the FTSE 100 on the same dates (nine different days) would have returned less than 4%. Over the entire period (end of July to now), the FTSE 100 rose by just 1%.
Whichever way you look at it, the results show that by carefully identifying prospects that have strong fundamentals and that represent good value, it is certainly possible to beat the market and achieve a strong return.
Of the 17 recommendations, only three lost value. These were Cineworld, Royal Dutch Shell, and Avation. Interestingly, these are among the shares that I am most confident about in the long term. I am a shareholder in all three companies, and I would view the current share price weakness as an opportunity to buy. Shell was the biggest faller, losing 4% over the period, as oil price weakness affected earnings.
Of the 14 shares that rose in value, six rose by more than 10% in the period. These were Elegant Hotels Group (55%), Anglo American (18%), Mondi (12%), Robert Walters (12%), One Savings Bank (20%), and International Consolidated Airlines Group (15%).
Shares in Elegant Hotels Group – the operator of upmarket hotels in Barbados – surged after the company was bought out by the huge US company Marriott International. The price that Marriott paid was at a significant premium to where the shares were trading before the offer, reflecting the fact that the shares were massively undervalued and trading well below their book value.
I’ve repeatedly found that company takeovers are one of the best ways to realise investment gains. The acquiring company usually pays a price that is a premium to the current share price, providing an immediate boost to returns.
Identifying takeover targets doesn’t have to be difficult. Simply look for small to medium-sized companies that are undervalued and growing, and that operate in a large market, with much larger players.
In fact, the shares that I recommended almost all have a couple of things in common: growing earnings and cheap valuations. Valuation is a key determinant of future share price performance, and combining this with earnings growth provides the perfect recipe for long-term outperformance.
Of course, when picking stocks to invest in, I’m looking to the long term, typically a five to ten-year horizon. In this case, short-term outperformance is simply a nice bonus.
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Thomas owns shares of Avation plc, Cineworld Group, One Savings Bank and Royal Dutch Shell A. The Motley Fool UK has no position in any of the shares mentioned. 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 2019