Buying the best UK shares today could allow an investor to make relatively high gains in a stock market rally. Even though the FTSE 100 has risen sharply in recent weeks, many high-quality companies trade at low prices.
By focusing on a company’s financial strength and its competitive advantage, it may be possible to unearth the most attractive buying opportunities in unpopular sectors. Doing so could reduce risks and produce relatively impressive growth in a likely long-term stock market recovery.
Searching for the best UK shares in the least popular sectors
Some of the best UK shares to buy today may be operating in sectors that remain unpopular among investors despite the recent stock market rally. For example, many companies operating in sectors such as telecoms, consumer goods and financial services are trading at significantly lower share prices than they were at the start of the year. That’s mostly down to weak investor sentiment towards a specific industry.
Certainly, such companies are likely to find operating conditions tough over the short run. This may mean their financial performances are somewhat limited in terms of growth potential. However, their long-term prospects could improve as a result of fiscal and monetary policy stimulus. As well as a likely return to more positive economic conditions that has always been the case in the past.
Buying cheap UK stocks for the long term
Buying the best UK shares in unpopular sectors could be a profitable long-term strategy. For example, they may have sound financial positions that mean they’re likely to overcome short-term challenges. They may also have solid market positions. These can be improved upon to offer greater sales and profit growth over the coming years.
However, because their industry outlook is uncertain, they may have low valuations in many cases. For example, they may trade on valuations below their historic averages. Or they may have valuations in line with their sector peers when they deserve to trade at a premium.
Buying high-quality companies at cheap prices has historically been a successful means of generating high returns from a stock market recovery. With many of the best UK shares currently offering wide margins of safety due to weak investor sentiment, there may be buying opportunities on offer.
The practicalities of finding attractive UK stocks
Clearly, the best UK shares to buy for the long run may face risks in the short run. Therefore, it’s important to diversify across a wide range of businesses that operate in multiple sectors. That way, an investor is far less reliant on a small number of companies to generate growth.
With the low cost of diversifying and with many UK stocks trading at cheap prices, building a portfolio that benefits from a long-term stock market rally could be a realistic goal for many investors. It may allow them to benefit from the FTSE 100’s recovery potential in the coming years.
The post Stock market rally: how I’d find the best UK shares to buy 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