At The Motley Fool, we love buying cheap stocks when markets are volatile and and share prices are down. This week’s troubles may hand us another great entry point.
I’m writing this before trading starts on Monday, but it looks like being a crazy day, following the collapse of US-based Silicon Valley Bank on Friday.
An uncertain week ahead
Contagion spread to the UK banking sector, with Barclays, HSBC and Standard Chartered falling by around 5% and Lloyds Banking Group down 4%. In an interconnected world, any shock in the US is instantly felt over here.
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The weekend press was full of articles agonising over whether we are heading into a full-scale banking meltdown and financial crisis. The consensus was that we should escape, but only by the skin of our teeth.
We are about to find out whether regulatory efforts to underpin the banking sector after the financial crisis have paid off. The Bank of England’s most recent financial stability report claimed UK banks are sufficiently capitalised and strong enough to deal with a sharper deterioration in economic outlook.
The big underlying problem facing the banking sector – and the rest of the economy – is that interest rates are continuing to climb after more than a decade when borrowing was pretty much free.
The cracks are becoming visible and could widen with the US Federal Reserve and Bank of England warning of further rate hikes to come.
The weekend has given regulators in the US and UK time to formulate their rescue plans. In the US, deposits will be protected. HSBC is set to buy SVB UK. This bodes well, but there will be more surprises both pleasant and unpleasant.
I will be watching closely, because I’m in the mood to buy more cheap stocks. I had a splurge last October when the FTSE 100 dipped below 7,000. And I bought Lloyds, Persimmon, Rio Tinto and Rolls-Royce because I thought they looked cheap, and they subsequently shot up.
UK shares could get cheaper
When the FTSE 100 hit 8,000 it was a little harder to find value on the market, but far from impossible. As I have written in recent weeks, Aviva, Legal & General, BT Group and Unilever all look nicely priced to me. They could look even cheaper in the days ahead.
Working out whether a share is good value is a far from exact science. I start by looking at metrics such as price/earnings and price-to-book ratios. Then I look at recent performance, favouring shares that have underwhelmed in some way. Next, I pore over the company’s accounts to see if markets have been too hard on the business, and a turnaround is likely.
Even then, I might not get it right. It’s impossible to know everything about a stock. I do know this though. In times of trouble, stocks quickly get cheaper. As someone who likes to buy and hold, short-term volatility is a great long-term opportunity.
I’m crossing my fingers that the latest crisis is quickly sorted and we avoid something really nasty. I also hope to turn any dip to my advantage and buy cheap UK shares.
