Should you invest in the great bounce back boom?

FOR most investors, 2020 was a tale of two extremes: some markets boomed, while others plummeted.

The success of tech stocks is well known, but there were other winners too, including some closer to home.

B&Q owner Kingfisher, food delivery service Ocado and supermarket supplier Premier Foods all thrived in lockdown last year.

But one year on and the picture is very different. Many of 2020’s success stories — not least the big tech stocks — are suddenly looking less buoyant.

But we’ve also seen impressive growth in recent weeks from so- called ‘ recovery’ stocks that crashed during lockdowns last year.

Of the top ten stocks purchased this year by customers of AJ Bell Youinvest, eight are companies that lost significant value last year.

So have investors hoping to cash in on post-lockdown recovery missed the boat? Or are there still bargains to be had?

Look for recovery

WHEN you look at the FTSE, there’s no doubt that 2021 has seen a swing towards recovery stocks.

Take BP and IAG, the owner of British Airways, which were among the hardest hit last year and are now up 19 pc and 25 pc since January.

‘The strongest recovery has been in the FTSE 250,’ says Richard Hunter from Interactive Investor, referring to the domestically focused index that sits under the FTSE 100.

He predicts that, if spending levels match expectations, the recovery has longer to run — meaning that investors haven’t missed the boat.

Much of the recovery is driven by real-world data, pointing towards a sustained rise in business.

EasyJet, for example, has said that throughout February, demand for bookings tripled from week to week.

Don’t rush in

HOWEVER, before you rush in to buying cheap shares, it’s worth bearing in mind there’s no guarantee that prices will return to their ‘old’ level.

That’s because a company’s share price is based on what investors think it’s worth, not its inherent value.

Oil producer Premier Oil remains 78 pc below its pre-Covid level. While the oil price has risen, the company remains saddled with debt and is vulnerable to rising interest rates.

Comparing a company’s current price to recent levels can be very useful. FTSE darling JD Sports, for example, surprised many marketwatchers with its 56 pc fall last year. Having more than doubled in value since then, it’s now just 8 pc short of where it was before the pandemic.

‘When choosing recovery stocks, financial strength is key,’ says Alan Custis, head of UK equities for Lazard Asset Management.

‘As there is no certainty as to the duration of the pandemic, we suggest focusing on those companies that have raised sufficient capital to continue operating.’

Asked for his tips on potential recovery stocks, Richard Hunter cites drinks company Diageo and NatWest — two members of the FTSE 100. ‘ NatWest’s shares have doubled since September,’ he says. ‘The bank remains cash rich and a quicker-than- expected economic recovery would significantly improve its bottom line.’

Diageo, meanwhile, remains ‘profitable and cash rich’, with growing demand in the U.S. and China.

Go for good value

THE process of selecting undervalued stocks is known as value investing. Though very simple in theory, it can be difficult in practice.

The Temple Bar Investment Trust has long been a well- known proponent of UK value investing.

For years it was considered a shrewd pick for retail investors, and a good dividend payer, too, until its price fell 56 pc last year.

With new management, the trust has refocused on a smaller number of stocks it believes are undervalued.

Its current picks include Royal Mail (up 54 pc this year), Marks & Spencer (15 pc) and ITV (15 pc).

The trust’s long-term performance is mixed — due to last year’s dip — with a five-year £10,000 investment now worth £11,500.

Another option is to purchase a passive fund that tracks the FTSE 250. As your money will be spread across the index, it will grow in line with the combined prices of the underlying shares.

If you had put £10,000 in a FTSE 250 Index Fund five years ago, it would now be worth £14,500.

By backing an index fund, investors don’t have to worry about whether they’ve missed the boat on individual companies, and can instead bet on a wider economic recovery.

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