Last week, I bought several UK stocks to become almost fully invested again. And that’s after sitting with a high weighting of cash in my portfolio for several months.
The shares came from various sectors, but they all have low-looking valuations in common. And the UK market is a bountiful hunting ground for value.
Changing market leaders
For several months many of the stocks leading the charge in the previous bull run have been turning down.
For example, I’m thinking of names in the US market such as the television streaming platform Roku and internet company Twitter. In the UK market, we’ve seen stock weakness for firms such as power products maker Volex and online clothing retailer Boohoo among others.
Stocks like those led the charge higher from the bottom of 2020’s coronavirus crash. But now they are reversing. However, I’m not inclined to focus on such past leaders much unless their valuations become compelling. That’s because it’s often a fresh clutch of stocks that lead new bull runs higher.
And for some time, market commentators have been talking about an investor rotation from high-growth stocks into value stocks. And it’s been happening. However, much of my portfolio remained in cash because the transition of the market looked piecemeal to me.
Even great traders such as Mark Minervini have been sitting in cash. And he’s been wondering whether the rotation is temporary or more enduring. But recent macro events have convinced me the move has legs. And I’m encouraged because plenty of value shares have recently burst into life.
Powerful market drivers
But I’m not the only investor thinking like this. Halfway through my stock buying spree, I read a recent article by Edmund Shing. He pointed out rising inflation is causing central banks to lift base interest rates. And wage growth will likely fuel the problem.
Bond yields have been rising, Shing said, and that puts pressure on growth stocks. And as evidence of the ongoing investor rotation from high-priced businesses, he observed America’s S&P 500 index has been outperforming the Nasdaq since mid-2020.
Shing’s conclusion is many investors are switching into stocks in cyclical sectors such as banks, life insurance, mining, oil, retail and others. And that’s because they will likely benefit from higher interest rates. For example, he said, dividend-focused strategies look like they are beginning to perform well when built around stocks in such sectors.
My own strategy is a little simpler. I reckon bruised growth stock investors will likely look for classic value now. And that’s the shift, as I see it. So for me, expensive, growth-oriented and trend-following tactics are out the window. Instead, I’m looking for stocks with strong value characteristics. That’s because I believe their time in the sun is imminent and they are set for a potentially strong long-term performance.
My recent buys include British American Tobacco, energy company Centrica, media and entertainment company ITV, copper miner Atalaya Mining and power transmission products provider Renold among several others. Of course, my theories could prove to be incorrect. And there’s no guarantee of a positive long-term investment outcome just because I think I’m seeing good value in these stocks now.
Nevertheless, I believe it’s a great time for me to pick UK stocks with strong value characteristics to hold for the long term.
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Kevin Godbold owns shares in Atalaya Mining Plc, British American Tobacco, Centrica, ITV, and Renold. The Motley Fool UK has recommended British American Tobacco, ITV, Roku, Twitter, and boohoo group. 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.
