Buying and holding cheap UK shares ahead of a likely stock market rally has historically been a sound means of generating high returns.
After all, this strategy involves buying companies for less than they may be worth while investor sentiment is weak. Over a period of months, or years, those companies could record relatively high returns as a result of their low starting prices and improving investor sentiment.
While the FTSE 100 and FTSE 250 have made gains in recent weeks, they contain many cheap stocks at the moment. Therefore, now may be the right time to buy and hold these five companies in an ISA.
Many UK shares in the financial services industry could be major beneficiaries of a likely stock market rally in the coming years. For example, Standard Life Aberdeen’s financial performance is closely linked to the prospects for global asset prices. When they are rising, investor sentiment strengthens and the firm may report improving assets under management figures. Furthermore, its 15% share price fall in 2020 may mean it is undervalued.
Barclays is another FTSE 100 financial services business that may produce impressive returns in the long run. Its shares have declined by over 20% this year. Despite this, it is due to post a 78% rise in earnings next year. This puts the stock on a forward price-to-earnings (P/E) ratio of only around 10. This suggests that it could offer good value for money relative to other UK shares. And it may deliver impressive returns in a stock market rally.
UK shares with attractive dividends may also benefit from a long-term stock market recovery. For example, Vodafone’s 6%+ dividend yield could make it attractive. That is especially so when there are limited options to make a passive income outside the stock market. Similarly, BHP has a dividend yield of around 6%. Its solid asset base and diverse range of operations may mean it can survive an uncertain period. And it may then be able to deliver impressive total returns in the coming years.
Meanwhile, Shell could offer an impressive long-term performance. Its plan to invest in the green recovery may mean it can deliver attractive returns over the coming years. Its 4% dividend yield and attractive profit forecasts in an improving global economic environment could mean that investor sentiment strengthens significantly after a challenging year for the oil industry.
Clearly, all UK shares could face an uncertain period if a stock market rally takes time to develop from current levels. But, with the FTSE 100 having always posted fresh record highs after its previous downturns, now may be the right time to invest money in a range of stocks to benefit from a likely stock market recovery in the coming years.
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Peter Stephens owns shares of Barclays, BHP Group, Royal Dutch Shell B, Standard Life Aberdeen, and Vodafone. The Motley Fool UK has recommended Barclays. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.