2 stocks to buy for a recovery in the stock market

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UK shares had a torrid week FTSE 100 the index falls by almost 6 per cent. But when there is panic, there can be opportunities. That’s why I’m looking for the best stocks to buy right now.

It started with the collapse of Silicon Valley Bank, the sixteenth largest lender in the United States. And it continued with concerns about Swiss credit‘s financial situation.

By the end of the week, the Swiss National Bank provided £45bn. in financing to Credit Suisse. But the stock market remains on edge.

Fear and greed

Market psychology plays an important role in stock market investing. Mr Market sometimes behaves irrationally and fear pushes share prices down.

Warren Buffett coined the now popular phrase, “Be fearful when others are greedy, and greedy when others are fearful”.

When investors are scared, it can sometimes lead to undervalued stocks. A bit like a shopping sale.

Remember that panic in the stock market is not always unfounded. For example, some concerns regarding banking problems are justified.

A sharp rise in interest rates in the US and Europe has created challenges for many banks. But it remains to be seen whether they can be sufficiently contained.

Finding stocks to buy

Nevertheless, history shows that all challenges are eventually overcome in one way or another. And stock market falls lead to recovery.

To get ahead of the pack, I want to find the best stocks to buy now that are likely to recover quickly.

To do that, I would focus on high quality stocks. By this I mean that they must demonstrate a sustainable competitive advantage. It’s what Warren Buffett would call a moat, and it could be in the form of technology, a popular brand, or solid patents.

I would also look for a double digit profit margin, low debt levels and plenty of cash flow.

Top choice

Right now, if I had extra cash, I’d buy stocks Play workshop (LSE:GAW). This fantasy miniatures specialist boasts a phenomenal return on capital of over 50%. In my opinion, this is an excellent sign of a quality business.

It is a well-run global company focused on long-term success. Its competitive advantage comes from sound intellectual property. It creates a solid entry barrier for potential competitors.

Keep in mind that in a cost of living crisis, spending on this hobby may slow. That said, one of its most exciting areas of growth right now is licensing.

In recent months, Games Workshop has entered into an agreement with Amazon to help turn its characters and stories into TV shows, movies and merchandise.

This is an exciting partnership for the company. And despite being an established company for many decades, I feel the story is just beginning.

Undervalued stock

If I had extra cash, another stock that I would buy was ahead of a stock market rebound Hargreaves Lansdowne.

Investment platform Hargreaves Lansdown should benefit from the government’s recent abolition of the lifetime allowance. I expect access to SIPP accounts to increase. It faces competitive pressures, but it is a high-quality and cheap stock.

It has a return on capital of a whopping 50%, a price-to-earnings ratio of just 13 and a dividend yield of 5%. It all sounds good to me.

The 2 stocks to buy for a stock market rebound appeared first on The Motley Fool UK.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Harshil Patel holds positions at Amazon.com. The Motley Fool UK has recommended Amazon.com, Games Workshop Group Plc and Hargreaves Lansdown Plc. The views of the companies mentioned in this article are the author’s and therefore may differ from the official recommendations we provide in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a wide range of insights makes us better investors.

Motley Fool UK 2023

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