How I’d Identify the Best Shares to Buy in a Stock Market Recovery

The best shares to buy in a stock market recovery may offer a mix of financial strength, growth potential and a wide margin of safety.

Finding the best shares to buy in a stock market recovery can be a challenging task. After all, forecasts are very dependent on the economic outlook, which itself is likely to be heavily impacted by coronavirus.

However, by investing money in financially-sound businesses that have long-term growth potential while they trade at low prices, an investor could reduce their risks and increase their potential rewards.

Financial strength is key to long-term performance

The past performance of equity markets suggests that a long-term stock market recovery is likely to continue in the coming years. Even if there are downturns in the meantime, the stock market has always produced new record highs after each of its previous bear markets.

However, companies must be able to survive present economic difficulties in order to benefit from a period of growth in the long run. As such, identifying those businesses that have large cash positions, modest amounts of debt and access to liquidity should it be required could be a shrewd move. They may stand a better chance of surviving the short-term challenges that continue to face many sectors to benefit from improved operating conditions and stronger investor sentiment in the coming years.

Low valuations ahead of a stock market recovery

In a stock market recovery, the best performing shares are often those companies that previously traded at low prices. They have greater scope to deliver capital gains, since they trade at a larger discount to intrinsic value.

As such, buying undervalued stocks today could be a profitable long-term move. They can be found by, for example, looking at the value of their net assets versus share prices, or by considering their earnings track record in a variety of operating conditions. This may provide guidance as to whether they have the capacity to trade significantly higher in the long run. In cases where they seem to offer wide margins of safety, there may be opportunities to deliver market-beating performance.

Identifying potential growth opportunities

It is difficult to assess the prospects for any stock at the present time. Ultimately, nobody knows how the economy will perform due to the ongoing pandemic. Furthermore, the financial cost of the pandemic remains unclear, which could have an impact on growth opportunities within many industries.

However, buying companies that may benefit from underlying industry growth trends could be worthwhile ahead of a stock market recovery. For example, healthcare companies may capitalise on demographic changes such as an ageing population in future. Equally, online retailers may use digital growth opportunities to enhance their earning capacity.

Through purchasing such companies when they have solid finances and trade at low prices, it is possible to capitalise on a long-term market rally. This could improve an investor’s financial position in the coming years.

More on Investing

woman checks off all the boxes
Dividend Stocks

5 CRA Red Flags to Watch in Retirement Tax Returns

A few common retirement-return mistakes can trigger CRA follow-up, and most are avoidable with a quick pre-filing checklist.

Read more »

Business success of growth metaverse finance and investment profit graph concept or development analysis progress chart on financial market achievement strategy background with increase hand diagram
Bank Stocks

1 Canadian Stock That Comes Close to Perfect as a Long-Term Hold

Fairfax Financial (TSX:FFH) combines a resilient insurance business with disciplined investing and smart capital allocation, making it one of the…

Read more »

A worker overlooks an oil refinery plant.
Dividend Stocks

An Ideal TFSA Stock With a Steady 4.4% Yield

Here's why this defensive growth stock offering a yield of roughly 4.4% today is such an ideal investment for a…

Read more »

Women's fashion boutique Aritzia is a top stock to buy in September 2022.
Tech Stocks

What Are the Best High-Growth Canadian Stocks to Buy Now?

Three Canadian growth stocks look compelling, but they’re priced for success, so gradual buying and position sizing matter.

Read more »

Dividend Stocks

3 Undervalued Canadian Dividend Stocks to Buy Now and Hold for Years

Three Canadian value ideas offer a mix of growth, income, and a real-asset discount, without relying on a “too-good-to-be-true” yield.

Read more »

House models and one with REIT real estate investment trust.
Dividend Stocks

1 Dividend Stock I’d Feel Good About Owning for the Next 7 Years

Choice Properties REIT offers a reliable 4.8% yield backed by Loblaw leases. Here is why this Canadian dividend stock is…

Read more »

holding coins in hand for the future
Dividend Stocks

My 2 Favourite Stocks for Monthly Passive Income

Unlock the potential of monthly dividends with Canadian stocks, focusing on REITs and royalty companies for consistent cash flow.

Read more »

hand stacks coins
Dividend Stocks

3 Dividend Stocks Yielding +4% Canadians Can Own Even When Growth Falls Out of Favour

These three dividend stocks are worth considering for passive income and long-term growth, particularly on market dips.

Read more »