Determining which companies can be classed as ‘top shares’ is very subjective. However, they could include businesses that have a competitive advantage, and that trade at fair prices given their financial outlooks.
Through buying a diverse range of them, it is possible to build a portfolio that can deliver attractive returns over the long run. With many opportunities to buy undervalued shares still available despite the recent stock market rally, now may be the right time to start the process of capitalising on today’s top stocks.
Defining which companies are top shares
Businesses with competitive advantages over their peers may be more likely to be classed as top shares. For example, they may have a unique product that means they can generate higher margins than their rivals. Or, they could have a lower cost base and stronger brand loyalty that lifts their financial performance over the long run.
Similarly, the most appealing shares may be those companies with solid balance sheets and strong cash flow. This point may be especially relevant at the present time, since the outlook for the economy continues to be very uncertain. Financially-sound businesses may be better able to overcome threats to economic growth caused by the coronavirus pandemic.
Meanwhile, top shares may be those companies that have all of the above attributes, but yet trade at low prices. Their low valuations may, for example, be caused by weaker recent performance that can be reversed over the long run. Or, investor sentiment towards their sector could be downbeat. This may present an opportunity to buy high-quality companies trading at low prices.
Building a portfolio of attractive stocks
Once top shares have been identified, building a portfolio of them can be a challenging task. After all, it is tempting to simply focus on a small number of the best ideas that are available at a given point in time. However, this may lead to high company-specific risk that means an investor is very reliant on a small number of holdings for their returns. Through buying a wider range of businesses, it may be possible to reduce overall risks.
Furthermore, holding some cash in case of a stock market crash can be a shrewd move. This does not mean that an investor relies on savings accounts for their returns. Rather, they have a limited amount of cash available so they can add more stocks to their portfolio should appealing opportunities come along in future. This may mean lower returns in the short run, but can provide greater opportunity to capitalise on the stock market cycle when seeking to buy top stocks.
Taking a long-term view
As ever, even top shares can experience periods of disappointment. Therefore, it is important to take a long-term view of any portfolio that contains equities. The track record of the global stock market shows that it can deliver attractive returns relative to other mainstream assets.
