It’s been a challenging year for the stock market. And while indices such as the FTSE 250 have made some significant progress in recovering from last year’s correction, many of its constituents continue to trade at discounted valuations.
As a long-term investor, this volatility, while frustrating, isn’t a major concern. After all, businesses require a long time to fulfil their objectives. And investors solely focused on the quarter-to-quarter performance can often overlook promising enterprises that may thrive over the next decade.
The short-term outlook for many companies is rife with uncertainty. But for many top-notch enterprises, their long-term strategies remain intact, making today’s continued low prices look like a bargain buying opportunity, in my eyes. So much so that I’ve already been going shopping.
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Dividends on sale
The latest addition to my income portfolio is Safestore (LSE:SAFE), the UK’s leading self-storage provider. As businesses go, renting out storage space to consumers and companies isn’t the most exciting business model out there. And the higher interest rates make operational expansion more challenging since it’s hardly cheap to acquire or construct these facilities.
That would certainly explain why the FTSE 250 stock has tumbled almost 15% in the last 12 months. As does occupancy levels sliding from 84% to 79%.
While these are valid concerns, neither trend is surprising. In the meantime, rental revenue and cash flow are still rising, with management offsetting the decline in occupancy with price hikes.
The economic environment obviously creates adverse conditions for Safestore. But it’s ultimately a short-term problem. And one that management doesn’t appear too concerned with, given it’s still-busy expanding operations while most competitors are looking to cut spending.
In my experience, providing the group doesn’t stretch itself too thinly, this could pave the way to stealing additional market share both in the UK and in Europe.
Pairing the drop in valuation with the continued expansion of dividends has pushed the stock’s yield to around 4.2% today. That’s the highest since 2013. And while the risks can’t be ignored, I think they’re worth taking for my portfolio.
Don’t ignore short-term challenges
Safestore, isn’t the only stock I’ve been snapping up lately, and it’s certainly not the only bargain in the FTSE 250. But it’s important to be wary of potential traps.
As previously mentioned, short-term disruptions don’t rank high on my list of concerns. But that doesn’t mean I should ignore them.
If a company can’t overcome these hurdles, the long-term picture becomes irrelevant. Knowing where the threats reside is a critical part of the stock-picking process. And it can also provide investors with early warning signs in future periods of volatility.
That’s why it’s important to investigate whether pessimism surrounding a business today is justified. It’s easy for downward pressure to trigger panic selling. And in some instances, this may be well deserved.
But it’s also possible to uncover hidden bargains to propel wealth to new heights in the long run.
