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2 shares to buy for a stock market recovery

Warren Buffett at a Berkshire Hathaway AGM

UK shares had a torrid week with the FTSE 100 index falling by almost 6%. But when there’s panic, there could be opportunities. That’s why I’m looking for the best shares to buy right now.

It started with the collapse of Silicon Valley Bank, the sixteenth-largest lender in the US. And it continued with concerns regarding Credit Suisse’s financial situation.

By the end of the week, the Swiss National Bank provided £45bn of funding to Credit Suisse. But the stock market remains on edge.

Fear and greed

Market psychology plays an important part in stock market investing. Mr Market sometimes behaves irrationally, and fear pushes share prices lower.

Warren Buffett coined the now popular phrase, “Be fearful when others are greedy and greedy when others are fearful”.

When investors are fearful it can sometimes lead to undervalued stocks. A bit like a shopping sale.

Bear in mind that stock market panic isn’t always unfounded. For instance, some concerns regarding bank difficulties are warranted.

A sharp rise in interest rates in the US and Europe has created challenges for many banks. But it remains to be seen if they can be sufficiently contained.

Finding shares to buy

Nevertheless, history shows that eventually all challenges are overcome in some way or form. And stock market tumbles lead to recoveries.

To get ahead of the pack, I’d like to find the best shares to buy now that are likely to swiftly recover.

To do so, I’d focus on high quality shares. By this I mean they should demonstrate a sustainable competitive advantage. It’s what Warren Buffett would call a moat, and it could be in the form of technology, a popular brand, or solid patents.

I’d also look for a double-digit profit margin, low levels of debt, and plenty of cash flow.

Top pick

Right now, if I had spare cash, I’d buy shares in Games Workshop (LSE:GAW). This fantasy miniatures specialist boasts a phenomenal return on capital of over 50%. That’s an excellent sign of a quality business, in my opinion.

It’s a well-run global company that focuses on long-term success. Its competitive advantage comes from defendable intellectual property.  That creates a solid barrier to entry for would-be competitors.

Bear in mind that in a cost-of-living crisis, spending on this hobby could slow. That said, one of its most exciting areas of growth right now is licencing.

In recent months, Games Workshop struck a deal with Amazon to help turn its characters and stories into TV shows, movies, and merchandise.

This is an exciting partnership for the business. And despite being an established company for many decades, I feel the story has just begun.

Undervalued stock

If I had spare cash, another share that I’d buy ahead of a stock market recovery is Hargreaves Lansdown.

Investment platform Hargreaves Lansdown should benefit from the government’s recent abolition of the lifetime allowance. I’d expect inflows to SIPP accounts to rise. It faces competitive pressures, but it’s a high-quality and cheap stock.

It has a return on capital of a whopping 50%, a price-to-earnings ratio of just 13, and a 5% dividend yield. That all sounds good to me.

The post 2 shares to buy for a stock market recovery appeared first on The Motley Fool UK.

Our analysis has uncovered an incredible value play!

This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!

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See the full investment case

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Harshil Patel has positions in The Motley Fool UK has recommended, Games Workshop Group Plc, and Hargreaves Lansdown Plc. 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.