Buying opportunities among the unloved
By Scott Phillips (TMFGilla) - September 19, 2011
Buying something on special is one of life’s little pleasures. And with the sharemarket down 16.5% from its 2011 highs, there are no shortage of bargains.
Whether it’s an end of season fashion clearance, the annual Boxing Day sales or the newest iteration – daily deal websites – we seemingly can’t resist a great deal.
But Wait, There’s More!
Retailers have long understood this phenomenon, and have used it to entice us to make a purchase we otherwise weren’t planning, or to close a deal on something we were wavering over. It’s also the theory behind the free set of steak knives made famous on television ‘infomercials’.
Sometimes the discount being offered is from a price that was way too high in the first place – so the price reduction simply makes the product reasonable value rather than dirt cheap. At other times the product may be a factory second or ‘shop soiled’ – and you’re being compensated for the lower quality of the item in question. In yet other situations, the retailer has a glut of winter stock and the weather outside is warming up.
The lesson, well understood by canny shoppers, is to know what you’re buying, why you’re buying and to make sure you understand why the price is cheap. If you’ve ever bought a fitness machine from an infomercial that’s now gathering dust in a cupboard or garage, you know what I mean.
With that warning firmly in mind, I waded into the unloved end of the sharemarket – those shares trading either very close to their 52-week lows or a long way from their 52-week highs. You won’t be surprised to know there was significant overlap between these groups.
The rationale was simple – to see if I could find value among the stocks that had been sold off the most. Many share prices would have – quite appropriately – suffered proportionally to the quality or risk of the business itself. My challenge was to see if I could uncover companies who had suffered more than they deserved.
Catalogue king Salmat (ASX: SLM) seems to be as unpopular as many find its letter-box fillers. The company has been through a turbulent time in the past year, losing a call centre contract and struggling to find growth in a tough business market (it also provides contact centre and business process outsourcing services). While both revenue and earnings per share fell, the share price is down 40% from its 52-week.
On a single-digit price/earnings ratio, and with a trailing dividend yield of over 8%, not much needs to go right from here for investors in Salmat to do well.
The Thousand-aires Factory?
For a company that was used to being a market darling, Macquarie Group (ASX: MQG) has fallen back to earth with a thud. Down almost 50% from its 52-week high (and down around 75% from its all-time high), the market seems pretty sure the famed ‘Macquarie model’ is trashed beyond recognition. I agree – its usual business model of managing satellite infrastructure funds seems to have been consigned to history.
That said, Macquarie’s main asset has always been the ability of its people to find ways to make more money for the company – and that competitive advantage remains intact. Investing in a company whose main assets walk out the door each night is riskier than investing in a bricks and mortar business, but the returns can also be more impressive. It’s a brave person who bets against the combined brain power of the ‘silver donut’.
No Flight to Safety
Much of the talk of retail softness in Australia has suggested that the strong Australian dollar is making overseas retailers more popular among Australian consumers. The same culprit is blamed for discretionary spending being allocated to overseas travel, as the US, UK and Europe become more affordable for tourists spending Australian dollars. It might be surprising, then, to see Flight Centre (ASX: FLT) among the group of businesses trading near 52-week lows.
Trading as high as $32 and as low as $3.40 in the last 5 years, long term shareholders can be excused for feeling a little air sick from the turbulence, but the current price of just under $18 is more than 25% below the 52-week high, despite the company going from strength to strength.
Just as out of favour fashion can be a bargain for consumers prepared to shop around, companies which have fallen out of investor favour can be a fertile hunting ground for those prepared to do a little digging.
Invariably, there will be plenty of companies which deserve their new lows, but it is equally certain that there will be valuable wheat amongst the chaff.
Are you looking for another out-of-favour stock with big potential? Motley Fool readers can click here to request a new free Motley Fool report titled The Best Stock For $100 Oil.
Scott Phillips is The Motley Fool’s feature columnist. The Motley Fool’s purpose is to educate, amuse and enrich investors. This article has been authorised by Bruce Jackson. The Motley Fool’s disclosure policy is loved.
OUR #1 DIVIDEND PICK FOR 2016...
Forget BHP and Woolworths. This "dirt cheap" company is growing like gangbusters, and trading on a 5.6% dividend yield, FULLY FRANKED (8% gross). With interest rates set to stay at these low levels for years to come, for hungry investors, including SMSFs, this ASX company could be the "holy grail" of dividend plays for 2016.
Buying something on special is one of life?s little pleasures. And with the sharemarket down 16.5% from its 2011 highs, there are no shortage of bargains.
Whether it?s an end of season fashion clearance, the annual Boxing Day sales or the newest iteration – daily deal websites ? we seemingly can?t resist a great deal.
But Wait, There?s More!
Retailers have long understood this phenomenon, and have used it to entice us to make a purchase we otherwise weren?t planning, or to close a deal on something we were wavering over. It?s also the theory behind the free set of steak knives…