The stock market crash could mean there are more bargain shares now available to buy. Company valuations have fallen drastically across a wide range of sectors. While in some cases they may be deserved due weak financial outlooks, other businesses appear to offer excellent value for money given their financial strength and market position.
As such, now could be the right time to invest money in undervalued stocks. They could deliver impressive returns in the coming years that help you to retire early.
Identifying bargain shares
Of course, determining which companies can be viewed as bargain shares is not an exact science. However, it is likely to mean that the price at which a stock is trading does not fully value its long-term potential. This may be because investors are cautious about company prospects ahead of a possible second market crash. They may demand wider margins of safety to compensate them for an uncertain near-term outlook.
As such, a number of companies with strong balance sheets and robust market positions may be trading at low prices at the present time. Certainly, they could struggle to return to previous record highs in the short run due to political and economic risks. But on a long-term basis, they may prove to be very attractive investments that offer sizeable return potential.
Rising valuations in the coming years
Buying bargain shares may provide long-term growth because of improving company financial performance. For example, company profits are likely to increase as the economic outlook strengthens. This may not appear to be a likely outcome at the present time, given the existence of risks such as COVID-19, Brexit and the US election. However, major fiscal and monetary policy stimulus suggests that an economic recovery that boosts corporate profits is ahead in the coming years.
As well as rising profitability pushing share prices higher, improving investor sentiment could lead to capital growth for investors in the long run. As the financial pressure on businesses subsides and investors become less risk averse, they may accept higher valuations for stocks across the market. This could mean that undervalued stocks become more fully valued, thereby producing capital returns for existing investors.
A relatively attractive opportunity
Bargain shares could present the best means of improving your retirement prospects at the present time. Low interest rates are likely to mean disappointing after-inflation returns from cash and bonds, while high house prices may limit capital return prospects in the property market.
Certainly, a second stock market crash in 2020 cannot be ruled out. However, this risk provides investors with an opportunity to buy high-quality businesses when they are trading at low prices. Over time, they may produce impressive returns that boost your financial situation and help you to retire earlier than planned.
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Returns as of 6th October 2020
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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