3 steps I’d take to unearth the top shares to buy in February 2021

Despite the stock market rally following the 2020 market crash, it is still possible to find top shares to buy right now. Over time, they could deliver higher returns than the stock market, which could boost an investor’s portfolio performance.

Through analysing company valuations on a relative basis, considering the capacity for a recovery within struggling sectors, and assessing the financial strength of businesses, it is possible to unearth the most appealing shares to buy right now.

Low valuations among top shares to buy today

Following the stock market recovery, a number of companies now trade on high valuations. While they could move higher if investor sentiment continues to improve, the top shares to buy today may be those companies with more modest valuations. After all, lower valuations may mean there is more scope for capital growth as the economic recovery takes hold.

As such, it may be prudent to search for companies that have low valuations. They may be lower than their sector peers, or below their historic averages. In either of these situations, there may be scope for them to enjoy upward reratings over the coming months and years, as improving investor sentiment and reduced disruption from lockdown measures allow businesses to return to improved operating conditions.

Focusing on recovery opportunities

Some companies have been hit harder than others in the present economic crises. In many cases, this is through no fault of their own. For example, they may have experienced weak operating conditions because of a challenging economic outlook.

History suggests that buying such companies could be a shrewd move. The performance of the economy, and most sectors, is very likely to improve significantly over the coming years. This may mean that the financial performance of businesses that experienced falling sales and profitability in 2020 improves. This process may or may not take place in 2021, but is likely to come into force in the long run.

Therefore, searching for top shares to buy now in sectors with recovery potential could be a shrewd move. It may enable an investor to buy turnaround opportunities that deliver market-beating returns.

Financial statement analysis

Even cheap shares with recovery potential are of little use if they cannot survive short-term economic challenges. After all, to benefit from an economic recovery through an upward rerating, a company must first overcome short-term difficulties that may remain present for much of the current year.

Therefore, analysing a stock’s financial statements could be a sound idea. It will enable an investor to judge whether the company in question has the financial means to survive the short run to benefit from an improving long-term outlook. Top shares to buy today are likely to have low debt, access to liquidity and the means to cut costs now to become leaner entities prior to an economic recovery.

More reading

• The Pro Medicus (ASX:PME) share price zoomed 25% higher in January
• Why the Vection (ASX:VR1) share price is lifting today
• Why the Coca-Cola Amatil (ASX:CCL) share price is pushing higher
• Here’s why the Creso Pharma (ASX:CPH) share price is rocketing 18% higher
• Woolworths (ASX:WOW) settles shareholders’ lawsuit for $44.5 million

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. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

The post 3 steps I’d take to unearth the top shares to buy in February 2021 appeared first on The Motley Fool Australia.

from The Motley Fool Australia https://ift.tt/3ctdRvF