While some stocks have fully recovered from the 2020 market crash, others continue to trade at exceptionally low prices. Although there is scope for them to move even lower in the short run, over the long term a number of sectors appear to offer excellent recovery potential.
Therefore, buying a diverse range of undervalued stocks now could boost your portfolio returns over the coming years. They could prove to be among the most attractive buying opportunities of your lifetime.
Recovering from the market crash
The market crash caused a wide range of stocks to experience severe declines in their price levels in the first quarter of 2020. While some of them have recovered since then, many industries continue to be extremely unpopular among investors. Stocks trading within such sectors could, therefore, offer excellent value for money for long-term investors.
For example, low interest rates in many of the world’s major economies mean that banking stocks are generally viewed unfavourably by investors. Although they are set to experience lower profitability in the short run, over the long term they could deliver sound recoveries. Similarly, travel stocks, retail businesses and energy companies that have solid balance sheets may be able to adapt their business models to a changing economy. This may allow them to generate improving profitability that leads to rising share prices over the coming years.
Through focusing your capital on unpopular sectors after the market crash, you could enjoy market-beating returns over the long run. For many stocks in the aforementioned sectors, investor sentiment has very rarely been as weak as it is today. Therefore, now could be a rare buying opportunity.
Capitalising on undervalued stocks
Clearly, the market crash could be repeated in the near term. Risks such as the US election, Brexit and the coronavirus pandemic may cause investor sentiment to weaken further. Similarly, the weak prospects for sectors such as banking, travel and energy companies may lead to financial difficulties for their incumbents.
As such, it is important to buy a diverse range of businesses. Having a portfolio that is too concentrated on a small number of companies means you are reliant on them to deliver your returns. Should one or more of them disappoint in this regard, your portfolio’s performance could be severely impacted. This risk can be diversified away, which could produce higher returns in the long run.
Furthermore, buying the strongest and most dominant businesses in unpopular sectors after the market crash is a logical approach. They may not be among the cheapest stocks compared to some of their peers. But buying high-quality stocks at low prices may prove to be a better strategy than simply purchasing cheap stocks. Over time, strong businesses are likely to survive and prosper as their operating conditions improve, and investor sentiment does likewise. This could lead to higher returns for your portfolio.
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Motley Fool contributor Peter Stephens has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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