Unearthing the best stock picks for October 2020 may be a challenging task due to economic uncertainty. However, it could produce high returns.
The uncertain economic outlook could provide investors with an opportunity to find attractive stock picks. Many high-quality businesses are trading at low prices due to the challenging trading conditions they currently face. As such, their valuations may be relatively attractive on a long-term view.
By focusing on unpopular sectors, companies with a long track record of growth and those businesses with solid financials, you could buy sound businesses at low prices. Doing so may not transform your portfolio returns in October, or even in 2020. But it could lead to impressive capital returns in the long run.
Searching for top stock picks in unpopular sectors
Some of the best stock picks in October 2020 may be trading in industries that are facing a difficult near-term outlook. The weak prospects for the global economy could cause lower profitability for sectors such as oil and gas, financial services and other industries that are reliant on consumer spending while sentiment is at multi-year lows.
Investors may naturally steer their search for the best shares away from unloved sectors. They may be relatively risky in the short run. However, due to their wide margins of safety, they could offer a relatively attractive risk/reward investment opportunity for long-term investors. And, since many stocks in the same industry may be viewed unfavourably by investors, there may be severe mispricings on offer.
Today’s most attractive stock picks may be those that offer some defensive characteristics. This does not mean that they are immune to a weak economic outlook that is likely to last for many months beyond October 2020. However, it could mean that they have the capacity to survive a difficult period for their industry and the wider economy.
As such, checking company annual reports and recent updates provides guidance as to the strength of a business. For example, it may have undrawn credit lines that can be used should economic conditions worsen. Or, it may have a history of outperforming its sector peers during more challenging periods for the economy. By investing in stocks with some defensive characteristics, you may be able to overcome a likely period of slower growth in the coming months.
Past performance can act as a guide
Companies with impressive returns prior to 2020 could prove to be some of the best stock picks at the present time. For many businesses, this year has been a hugely challenging period that may not provide an accurate means of assessing their long-term prospects. As such, using past performance over recent years may provide investors with a superior means of assessing the strength of a company’s outlook.
Certainly, the future is a known unknown. But by purchasing those companies with wide margins of safety, defensive characteristics and a long track record of growth, you may be able to improve your portfolio returns in the coming years.
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*Returns as of June 30th
Motley Fool contributor Peter Stephens has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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