I’m always on the lookout for stocks to buy that can help my portfolio grow and deliver passive income. And I think this moment in time provides a unique opportunity for buying top quality shares.
While the FTSE 100 has been pushing upwards this week, the reality is that many sectors have suffered — the index has been hauled upwards by soaring resource stocks.
But just because stocks are trading with lower share prices than they were a year ago, doesn’t mean they’re cheap. In fact, share prices often fall for a reason.
But, amid a beaten-down market, I stand a better chance of finding top-quality shares trading with lower multiples.
So what am I buying before the market recovers?
A bank set to outperform
Barclays (LSE:BARC) has underperformed over the past year. But the stock is only down 11% over 12 months, thanks to a recent rally.
The year was beset with challenges. Impairment charges have been rising throughout the year, reaching £381m in the third quarter alone. On a nine-month basis, the charge for potential bad debts rose to £722m, compared with a £622m release last year.
Barclays was also fined $361m for securities sold in error.
However, there are several reasons to believe 2023 will be a better year.
Firstly, interest rates are rising and this converts to higher net interest margins (NIMs). This is because banks imperfectly pass on higher lending rates to saving customers.
Each change in the Bank of England base rate will have an impact on revenue, not least because Barclays earns interest on cash deposits with the central bank. But Barclays also uses a hedging strategy to smooth the impact of the interest rate changes on net interest income.
Analysts have forecast that this could lead to an interest rate tailwind of £5bn in incremental revenue by 2025.
I’m also expecting the macroeconomic outlook to become more favourable later in the year, and this should be reflected in the share price. This is why I recently added more shares to my portfolio.
China’s reopening
My second pick is in China where stocks really pushed downwards last year.
2022 was a particularly rough year for Chinese auto stocks. Lockdowns and movement restrictions weighed on demand and caused supply chain bottlenecks. As a result, deliveries slowed and the rapid pace of expansion dropped.
However, 2023 should be a better year. Economic normality should be achieved for the first time in three years when the current epidemiological situations improves.
My top pick is Li Auto (NASDAQ:LI). The stock is down 25% over 12 months, and while the share price still demonstrates considerable volatility, I’m backing it to push upwards in 2023.
Performance has already picked up, with 20,000 electric vehicles (EVs) delivered in December, up 33% month on month. The L9 was well received in the summer, and the launch of the five-seated L7 in February is highly anticipated.
Chinese EV manufacturers will also continue to benefit from tax exemption of new EV sales throughout 2023.
I recently bought my first Li shares, and I’d still buy more. The valuation was an important reason for this — it trades at multiples far below its US peers. It’s also likely to be the first Chinese EV firm to turn a profit.
