Stock market correction: I’m hunting for fallen shares to build wealth

The stock market takes a hammering in 2022. The FTSE 100 is one of the few indices that did not bear significant losses during the year. But because the index is dragged up by increasing resource stocks.

So with many parts of the market still suffering, I hunt down stocks to push my portfolio forward as the market recovers. This is what I’m looking for.

Undervalued

A stock may look cheap if it was trading less than a year ago. But I want shares that are actually undervalued. And I think these stocks are easier to find in a bear market than a bull market.

This also required me to do some research. Using short-term valuations such as the EV-to-EBITDA ratio or price-to-earnings metrics, and comparing them across peers in the sector, I can develop a pretty good idea of ​​their relative worth.

I can also use the discounted cash flow (DCF) model, but this requires me to make an estimate of future earnings. And that can be difficult. But if done right, I can get a better idea of ​​the value of my investment going forward.

What I chose

Dividend stocks are a core part of my portfolio. So, more often than not, I look for undervalued dividend stocks. Also, when stock prices fall, dividend yields rise – assuming dividend payouts remain constant.

That is why I have bought shares such as Direct Line Group and Lloyds. The former has a dividend yield of 10%, while the latter is 4.5%. Both yields were boosted by stock prices that remained down at previous levels.

I also chose Direct Line Group because the company appears to be trading at a discount to its peers. The DCF model suggests that the financial services outfit is currently trading 46% below its fair value.

Discounted cash flow calculations also show that Lloyds is trading around 45% below fair value. Bank income is now pushed up by rising interest rates. Despite the macroeconomic environment, the short-term outlook looks positive.

But I don’t ignore growth stocks. I think the macroeconomic environment, characterized by high interest rates and slow growth, is not conducive to the growth of this stock. However, there are some companies that I support to excel.

With the reopening of China, I recently invested NIO and Li Auto. China’s two EV companies suffer from Covid restrictions, but opening up the economy should be a major boost.

Build wealth

I prefer dividend stocks because they allow me to pursue a compound yield strategy. This is the process of reinvesting dividends every year and earning interest for my interest.

For example, if I invested £10,000 in shares at an average of 8%, and reinvested the dividends for 30 years, at the end of the period I would have £81,000. That’s considerable growth, but it doesn’t include the stock price growth. Of course, my options may not grow and I may lose money. But it must be remembered that the FTSE 100 is now four times larger than it was 30 years ago.