UK Edition
There are no shortcuts to investment success. While some investors may try to time the stock market by trading shares on a short-term basis, ultimately a long holding period is required to allow compounding to work its magic.
Clearly, a long-term investment approach is easier to contemplate in theory than it is to put into practice. And it is particularly difficult to remain patient after the stock market’s distinctly underwhelming performance of recent years. Indeed, the FTSE 100 trades 1pc lower than it did at the start of 2018.
Investors, though, should retain a stoic approach despite the seemingly perennial nature of lacklustre returns. The FTSE 100 may have fallen over the past five years, but it has produced a 5.4pc annualised capital return since its inception in 1984.
When reinvested dividends are included, its total annual return is in the high single digits. Moreover, investors who have used periods of temporary stock market decline to purchase shares in high-quality companies are likely to have generated even greater returns than the wider market.
In Questor’s view, the stock market’s current bout of underperformance presents such an opportunity. Cyclical stocks with solid finances, such as advertising and communications specialist WPP, represent perfect buying opportunities during periods of economic uncertainty.
Not only is the company extremely likely to survive even the very worst possible global economic downturn, its shares trade on an exceptionally low valuation that means they provide long-term capital growth potential.
Its shares have declined by 26pc over the past year so that they are now priced 49pc lower than when this column first advised readers to buy them in March 2017. They currently trade on an adjusted price-to-earnings ratio of just 11, which suggests they offer a wide margin of safety.
And with net finance costs covered around six times by operating profit last year, the company is in a strong position to overcome a period of monetary policy tightening and a moderation in demand for its services.
Its solid financial position has even allowed it to make several acquisitions over recent months that could strengthen its long-term financial outlook as the global economy recovers. It has also enacted an £800m share buyback programme over the past year that could prove to be perfectly timed while its shares trade significantly below their intrinsic value.
The firm’s latest quarterly update showed that revenue increased by over 10pc despite notable weakness in China. The country’s easing of Covid-19 restrictions is likely to benefit the firm through its positive impact on the world economy.
WPP’s exposure to a majority of the world’s leading businesses means it is well placed to capitalise on their improving financial performance as the global economy recovers. And with the firm increasingly focused on digital advertising and e-commerce, it is in a strong position to adapt to evolving consumer tastes.
While the business recently reduced full-year operating margin growth guidance from an increase of 0.5 percentage points to a rise of 0.3-0.5 points, its £300m cost savings programme and upgrade to annual revenue guidance suggest its overall financial picture is relatively healthy amid global economic uncertainty.
Its dependence on the world economy’s prospects means that its shares are very likely to display elevated volatility over the coming months. Investors must therefore accept that the stock could yet deliver further paper losses over the near term should its operating environment deteriorate.
In Questor’s view, though, short-term risks to the company’s financial performance have been more than adequately factored in by the stock market via a substantial share price fall. It offers significant recovery potential for long-term investors who can remain patient in spite of disappointing recent returns.
The firm’s solid financial standing, commanding market position and cyclical status make it an excellent purchase while equity markets are readying themselves for the next bull market.
Questor says: buy
Ticker: WPP
Share price at close: 863.2p
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