The stock market crash has left some UK shares trading on extremely low valuations. In some cases, they may be warranted due to their weak financial positions or relatively high risks. However, other companies appear to offer once-in-a-lifetime opportunities to purchase high-quality companies at low prices.
Over time, such businesses could deliver improving profitability that leads to stronger investor sentiment. As such, buying a diverse range of them in a Stocks and Shares ISA today could prove to be a shrewd move.
The impact of the stock market crash on UK shares
Some UK shares have recovered strongly after the stock market crash. However, many others currently trade on extremely low valuations. A key reason for this may be that they are unable to offer investors a clear path to earnings growth in the coming months. Or, it may be because they do not have business models that are seen as being suited to a faster-paced economic outlook that is likely to lean on technology and the green economy to a larger extent.
As such, companies operating in sectors such as oil & gas, tobacco, banking and travel & leisure trade on exceptionally low valuations in many cases. Although they may deliver disappointing returns in the short run, they could have the financial means to survive a period of lower sales. Following that, their strategies could shift to allow them to adapt to changing consumer tastes, while an improving economic outlook may lift investor sentiment.
Such companies may offer once-in-a-lifetime investing opportunities after the stock market crash. Their low earnings multiples and heavily discounted price-to-book (P/B) ratios suggest that they offer wide margins of safety that could prove to be very rare even over the long run.
Buying cheap stocks for the long run
Investing money in UK shares after the stock market crash may not deliver impressive returns in the short run. More economic turmoil may be ahead that limits their capacity to recover. This may even mean that they continue to underperform the wider FTSE 100 and FTSE 250 indexes in the coming months.
However, history shows that buying high-quality businesses at low prices while they face tough operating outlooks may be a sound move. It can allow an investor to capitalise on attractive prices that offer significant capital appreciation potential as a result of weak investor sentiment.
With share prices having always recovered from a stock market crash in the past, now could be an opportune moment to build a diverse ISA portfolio of shares. Spreading the risk across a range of companies may limit risk during a challenging period for the economy. It may also provide an investor with access to multiple growth opportunities that may not present themselves all that frequently.
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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