In a difficult year for the markets, the FTSE100 ended 2022 in positive territory. Including dividends, the large cap index had a positive return of around 5%.
However, the index was backed by a handful of heavyweights, including Shell (+44%), glencore (+48%), BAE systems (+55%) and British American Tobacco (+20%).
In total, only 28 stocks in the FTSE 100 ended the year with price gains. The remaining 72 companies ended the year in the red, with some big names suffering serious corrections:
ocado – down 63%
Khaki – down 57%
Scottish Mortgage Investment Trust – down 46%
JD Sports Fashion – down 42%
Taylor Wimpey – down 42%
In total, I think 40 stocks in the FTSE 100 fell 20% or more last year. That’s why I would say the Footsie really suffered a stock market correction last year.
I think these fallen stocks are where the big opportunities are today. While some of these companies may have waited for a late sale, I think some of them are looking cheap now.
In the rest of this article, I will highlight three sectors where I see buying opportunities in 2023.
Last year’s sell-off hit major industrial stocks. Respected names such as steam management and pump specialist Spirax Sarco Engineering fell more than 30%. Testing and Certification Group Intertek suffered a similar fall.
These market-leading companies looked expensive at the start of 2022 and still don’t look cheap today. But they both have high profit margins and impressive long-term growth records.
While there is some risk that a global recession will put additional pressure on these companies in 2023, I think they could be good choices today for buy-and-hold investors.
Banks and insurers
Most of the big banks in the FTSE 100 offer attractive dividend yields and are likely to benefit from higher interest rates.
Although banks face the risk of increased losses on mortgage debt and other loans during a recession, I believe they are generally well positioned and affordably priced. I’m holding NatWest Groupbut would also consider Lloyd’s or Barclays.
insurers like Aviva and Legal and general Also seems like a decent value to me, with dividend yields approaching 8%. Although these are complicated businesses, I believe they are well managed and will likely benefit from higher interest rates.
Rising mortgage costs and the cost of living crisis mean the UK property market is slowing.
A sell-off also means some major homebuilders are now trading below their net asset value with attractive dividend yields. I think these stocks are starting to offer good value.
The risk is that we don’t know how far the housing market has to fall further. On the other hand, most FTSE homebuilders appear to be fairly well prepared, with plenty of cash, strong profit margins and low debt levels.
Underlying demand for new homes also appears to remain strong. I am interested in companies such as Barratt Developments and Taylor Wimpey at current levels.
Is it time to buy?
There is no guarantee that these companies will organize a takeover immediately. We could see further market volatility in 2023.
However, I believe these are examples of good quality FTSE 100 companies with the potential to generate strong medium term returns.
The post-market correction: I would start buying cheap FTSE 100 shares to build wealth appeared first on The Motley Fool UK.
Roland Head holds positions at British American Tobacco Plc, Intertek Group Plc, Legal & General Group Plc and NatWest Group Plc. The Motley Fool UK recommended Barclays Plc, British American Tobacco Plc, Intertek Group Plc, Lloyds Banking Group Plc and Ocado Group Plc. The opinions expressed on the companies mentioned in this article are those of the author and may therefore differ from the official recommendations we give in our subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that considering a wide range of information makes us better investors.
Motley Fool United Kingdom 2023