These shunned stocks are ripe for a rebound

Professional investor Alex Wright highlights three very different businesses that should bounce back once lockdown is over.

The recent indiscriminate sell-off has produced some attractive investment opportunities for selective long-term investors. In the near term, however, markets are likely to remain very volatile. While we are now starting to see some lockdown restrictions easing, I expect to see a very different backdrop and level of economic activity over at least the next six to 12 months from the one we have been used to.

Looking further out, however, I think the sharp drop in the oil price and the unprecedented monetary and fiscal stimulus will be positive for the UK economy (as well as for the global one) and will help to offset some of the negative effects of the lockdowns.

We focus on unloved companies undergoing positive change and are willing to hold them until their potential value is recognised by the wider market. It is also critical to understand the potential downside to limit possible losses. Moreover, given the huge degree of uncertainty about future outcomes, diversification is now more important than ever. I am therefore focusing here on three very different businesses.

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Cashing in on communication

I have recently increased my position in communication-equipment firm Ericsson (Stockholm: ERICB). I first bought it in early 2020 to take advantage of a significant expected increase in telecom-related capital expenditure and a reduction in competition.

Most obvious defensive sectors such as staples, utilities and pharmaceuticals have benefited from the sell-off and gone up materially as a percentage of the benchmark. However, the one product we are all using far more since the crisis, communication services, hasn’t. The sector is getting a short-term fillip from a reduction in the number of people swapping networks to chase the cheapest deal; their priority for now is the quality of mobile packages and calls.

Ericsson is also the largest producer of global telecoms equipment and therefore a key beneficiary as telecoms carriers invest to improve their networks for both 5G mobile technology and simply to cope with the unusually heavy current use of their networks.

Sturdy insurer will shrug off downturn

The sell-off has also prompted me to add insurance provider Legal & General (LSE: LGEN) to my holdings. Life insurance looks attractive from both a valuation and fundamental point of view. Legal & General’s operational performance remains solid given the market conditions and its balance sheet should be strong enough to withstand the downturn. The stock is likely to remain volatile in the near term, but offers significant upside over the longer term.

Educational publisher Pearson (LSE: PSON) has struggled over the past 18 months, but the outlook is auspicious. A rise in newly unemployed workers has historically been good news for the higher-education sector, while about 20% of the company’s revenues come from online learning, which should see greater usage from online schools and college programmes. The business is set to recover quickly when social distancing is relaxed and usually performs well in a recession – a quality investors seem to have forgotten.

Alex Wright is portfolio manager at Fidelity Special Values.