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It may seem strange to talk about a market recovery when everything looks bad. However, I think times like these are the perfect opportunity to stock up on great UK stocks before the dark economic clouds (inevitably) dissipate. Here are two examples.
A falling star
Share price of coach and sportswear retailer JD Sports Fashion (LSE: JD ) has been out of form so far in 2022. Indeed, the company’s value was cut in half. This smells like ‘opportunity’ to me.
To be clear, I don’t think the market got this wrong. JD is always likely to be bad when discretionary income is squeezed. At times like these, a new pair of expensive Nike or Adidas trainers is not so important.
There are other reasons. Investors don’t seem convinced that former B&Q man Régis Schultz has taken the helm. And being forced to sell the Fotasylum brand for much less than it paid doesn’t exactly inspire confidence.
Price entered?
But how much of this is reflected in share prices? I really appreciate it. As I type, JD trades at a price-to-earnings (P/E) ratio of just nine. That’s generally cheap compared to UK stocks and still reasonable for the consumer cyclical sector.
As long as next month’s update shows the company is hitting its conservative targets (and expectations aren’t revised again), I think this will warrant a bargain over time. Maybe it’s appropriate to drip feed my money here.
Quality stock
Another thing I buy is a kitchen sink. Joining of Howden (LSE: HWDN) Again, this may seem like an odd choice given the current state of consumer confidence. Like the Jedi, investors were fleeing stocks. a lot of. The company’s value is down nearly 40 percent by 2022.
Personally, I find the investment case here more attractive. In addition to its strong market share in the market, Howdens consistently generates high returns on its business capital.
It’s this (otherwise known as ROCE or return on capital employed) — not earnings over three, six or 12 months — that ultimately allows a company to increase value over time. This is why major investors like Warren Buffett and Terry Smith pay more attention.
Shares now trade for 11 times earnings. As tempting as it sounds, this assumption could still come back to bite me if we have a worse-than-expected recession on our hands. So, yes, there is still risk here.
On the flip side, there is a safe margin of 3.4% in the bid. This is obviously not enough to offset inflation. However, paying to wait is better than not paying at all.
Buy now, profit later
How long is this wait? No one knows. But remember that the market is forward-looking. By the time we get confirmation that the economy has turned around and is thriving again, stock prices will already be higher. Hence my desire to at least start buying these stocks.
It is possible to invest profitably without timing the markets correctly. Instead, I should invest in a Margin of safety This is enough to swing the odds of a good result in my favor.
Falling so far, I think this is likely to happen with these UK stocks.