Will next week offer investors a once-in-a-decade opportunity to buy UK shares?
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It’s been a volatile few weeks for UK stocks, but so far FTSE 100 it holds up very well. Is that about to change?
With the world facing the biggest energy shock in history, I would expect global stock prices to be down by now. They didn’t. But April had scars. The FTSE 100 ended the month almost where it started. Investors still prefer to believe that the conflict will be resolved somehow, and the Strait of Hormuz was reopened. I’m not convinced.
Oil markets cannot make decisions. On Thursday (April 30) a barrel of Brent crude hit $124, having more than doubled since the start of the Iran conflict. It has since dropped to $108. That provides some relief. But it is still very high. I have a lot of anxiety. So far, we have not had any significant shortages in the West, but they have come to Asia, and we are destocking at a record pace. If the shortage becomes real, the shock may subside.
Are we looking at a stock market crash?
HFI research has just been warned “panic buying” and accumulation as the earth absorbs raw materials. It says the shortage could accelerate the price past $150 a barrel. Obviously, we don’t know if that will happen, but I think the risk is starting to increase. Next week could be very bumpy, just like the rest of May. If UK stocks crash, I have my strategy ready. I will buy undervalued companies whose long-term prospects remain strong. I think we can look at a big opportunity for investors who are willing to hold their stock purchases for at least five to 10 years. Many already look tempting.
I was surprised, the FTSE 100 weapons manufacturer Babcock International Group (LSE: BAB) is now one of them. I watched its shares rocket for years, and thought I had missed my chance, as the shares were so expensive. But in April, defensive stocks took over across the board. A giant from the UK BAE Systemswhich I hold, is down 11.35%. Babcock fell 13.25%.
There are many more opportunities like this
No war? There is, and sadly it shows no signs of ending. Here’s what I think happened. Babcock has flown very high. Despite April’s dip, the stock is still up 270% in five years. As a result, it was very expensive, with an average income of up to 30. Investors decided to release some of the profit, and spend it elsewhere, perhaps with better value opportunities.
The slip was certainly not in anything Babcock had done. There has been little company-specific news in the past month, apart from another lucrative UK government contract win. Its order backlog is now a healthy £10bn, giving investors visibility into real earnings.
Another downside is that stocks are still not cheap. The IP/E is still 26.9, well above its 10-year average of 14.5. And if the Iran conflict is not resolved in some way, its shares could go down further – but although it might be bad for Babcock, it would be good for the world both on a social and economic level, so I won’t complain. I think Babcock looks tempting today. Now I watch it share like a hawk, and I will exploit any additional weaknesses. I expect to see many more opportunities like this in the coming weeks. I’m in a buying mood.
