The recent stock market rally has transformed the investment landscape. At the time of writing, the FTSE 100 has surged 9% over the last week and 15% over the last fortnight. All of a sudden – on the back of positive vaccine developments – there is now light at the end of the tunnel.
The share rally’s biggest risers seem to have been the companies the suffered the heaviest falls since the pandemic began in earnest, back in March. This includes the travel, hospitality and leisure industries, along with the banking sector. In some cases, share prices have now more than doubled from their spring lows.
One result of this stock market rally is that there are now considerably fewer attractive investment opportunities available. Where previously, share prices looked oversold and cheap, many now look more fairly valued. However, I think there are still noticeable areas of the market where value does exist to help me build a portfolio poised for growth.
In my opinion, some of the most attractive investment opportunities right now are the shares that didn’t sell off wildly during the depths of the pandemic. Likewise, they are the shares that didn’t get swept up in the recent rally. Instead, I believe they are the companies that looked cheap before the pandemic and remained so during it.
Overlooked by the stock market rally
I’m talking about the likes of Yellow Cake. The uranium investment company that is valued at a 23% discount to its net assets. This savvy company has spent the last few months selling its uranium holdings to fund a buy-back of its own shares. That way it gains exposure to the uranium price at hefty discount. Yellow Cake looks even more attractive to me after the announcement that Rolls-Royce plans to build up to 16 small modular reactors (mini-nuclear plants) in the UK. This looks set to revitalise the nuclear sector in both the UK and beyond.
Ferrexpo is another share that I like. As well as coming with an 8% dividend, it’s also cheap, trading at just three times last year’s earnings. I’m actually surprised the shares have not been caught up in the stock market rally, since demand for its iron pellets should benefit significantly from a vaccine-enabled return to worldwide economic growth.
Vaccine improves investment prospects
Shares in Finsbury Food Group are also still looking good value to me. The shares are valued at eight times pre-Covid (FY 2019) earnings. A return to normality would surely put the bread and cake manufacturer back on its growth trajectory. Meanwhile, I think both Aviva and Tesco look attractive. Aviva is trading at a 33% discount to its net asset value. Speculation of asset disposals only reinforces the value on offer. Owing to its own disposals, Tesco appears to be on the verge of announcing a huge 20% special dividend payment.
Despite the pandemic, all of these companies are currently performing well. In fact, I think that’s precisely why they missed out on the stock market rally. Investors were attracted to the companies that had been struggling the most, the ones that really needed some positive vaccine news. I believe we now have a situation where the companies that have actually been managing well are now looking under bought and very attractive. They are the shares that I would buy now.
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Thomas owns shares in Finsbury Food Group and Aviva. The Motley Fool UK has recommended Tesco. 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