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This is not the time to abandon quality shares

Selling quality companies like Woolworths Limited (ASX: WOW) or CSL Limited (ASX: CSL)? You must be mad, writes The Motley Fool.

It’s in times like these that I’m minded of Sir John Templeton’s theory of Maximum Pessimism, which recommends that the best time to invest is when the blood is running in the streets — figuratively, anyway. We need to be buying shares when nobody else wants them, and people are so scared that they’re selling off the best of our really great companies at stupidly low prices.

Are we at such a low point now? Let’s consider what we’ve seen so far.

The last boom
Towards the end of the last bull market, speculative investments were popular, with plenty putting their money into small-cap companies with great growth prospects in the hope they’d turn into multi-baggers in short order.

Oil and minerals were big, too, as the economic powerhouses of the developing world — most notably, China — were steaming ahead and were expected to be insatiable in their hunger for energy, metals and all the rest.

But since the crunch hit, all that kind of stuff has lost some of its shine; investors have refocused on companies that are more defensive and safer over the long term. So maybe China won’t want 20% more iron next year, but people still need food, right?

In short, there’s been a flight to quality, which is pretty much what happens whenever markets turn bearish. (But it does beg the question of why we don’t just stick to quality all the time.)

Fleeing too far
The trouble is, when you’re worried about the economy, bearish about shares and scared of losing money in your investments, what do you sell when you’ve already dumped your riskier shares and put the money into safe ones?

That fear seems to be here now, and people are selling off the quality stuff, like Woolworths. Sure, growth is slowing, but the company is still going to grow revenues and profits in 2012.

The search for quality
What other quality companies out there are unfairly depressed? Here’s a handful selected from the ASX top 50 that have seen their share prices fall over the past year. (Falls are from the peak prices attained over the last 52 weeks).

Company Div Yield Share Price Fall from peak
QBE Insurance Group Limited (ASX:QBE) 11.01% 11.64 41%
BHP Billiton Limited (ASX:BHP) 2.64% 37.14 25%
Computershare Limited (ASX:CPU) 3.62% 7.75 25%
Origin Energy Limited (ASX:ORG) 3.64% 13.57 21%
Westpac Banking Corporation (ASX:WBC) 7.56% 20.63 19%
CSL Limited 2.61% 30.62 20%
Australia and New Zealand Banking Group (ASX:ANZ) 6.69% 20.87 19%
Worleyparsons Limited (ASX:WOR) 3.12% 27.51 18%
Sonic Healthcare Limited (ASX:SHL) 5.19% 11.35 14%
Woolworths Limited 4.94% 24.73 12%

There are some pretty big falls there, and some surprisingly high dividend yields. Of course, if a company is heading for a tough patch, analyst forecasts will lag the market sell-off and, for a while, dividend yields will look unrealistically high before they are eventually slashed.

Down and outs?
But are these really 10 companies heading for a wipeout? I seriously doubt it. I’m not saying to rush out and buy them all without proper research, and one or two might be justifiably down. But I do think that overall they are more likely to be companies whose shares have been oversold as the current pessimism takes a disproportionate hold — just as it has with Woolworths.

Are we at a point of maximum pessimism now? Well, we’re not in quite the panic state we saw at the worst point of the slump back in 2008/9, but all the indications are that irrational pessimism is overshadowing longer-term optimism right now, and the early part of 2012 could be a golden opportunity to buy up good quality shares cheap.

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Motley Fool contributor Mike King owns shares in CSL, QBE Insurance & Woolworths. The Motley Fool’s purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Click here to be enlightened by The Motley Fool’s disclosure policy.

A version of this article, written by Alan Oscroft, was originally published on Fool.co.uk. Mike King has updated it.

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