One of the most challenging aspects of being an investor is working out whether a depressed share price is temporary or will last for many years. That's because, while all companies endure a challenging period at some point or another which causes their shares to underperform, sometimes this can lead to a downward spiral which leaves the company's investors nursing large losses.
Other times, though, a company can endure a tough period and then rebound to post stunning financial and share price performance. As such, it can be worth buying such a stock during its down period ahead of impressive gains.
An example of such a company is QBE Insurance Group Ltd (ASX: QBE). Its shares were in the doldrums for a number of years and, in fact, in the last five years they have fallen by 28% in total. A key reason for this was a relatively inefficient business model which, while well-diversified, failed to focus on the most profitable areas of the business. This culminated in a red bottom line, which clearly had a massively negative impact on investor sentiment.
However, under a new strategy which has steadily been disposing of non-core assets and focusing on driving efficiencies through the business, QBE's financial performance has turned around. It is now highly profitable and, looking ahead, is expected to post a rise in earnings of over 25% per annum during the next two years. This puts it on a forward price to earnings (P/E) ratio of 12.1, which indicates that the share price growth in the last year of 8% could be set to continue.
Meanwhile, packaging specialist, Amcor Limited (ASX: AMC), has posted a decline in its share price of 10% in the last three months. This may be a cause of concern for the company's investors and, with earnings set to rise by just 1.7% in the current financial year, it may appear as though there is no major catalyst to push the company's share price higher.
However, with significant exposure to non-Australian markets, Amcor should benefit from a weakening Aussie dollar and, furthermore, is likely to have access to faster-growing markets than the domestic economy. In fact, Amcor's bottom line is forecast to rise by 6.2% next year which, alongside a price to sales (P/S) ratio of 1.25 (versus 1.31 for the ASX) indicate that its share price performance is likely to be far superior in future. And, with a yield of 4.3%, it continues to have income appeal, too.
Of course, the outlook for Woolworths Limited (ASX: WOW) is rather downbeat. Its shares have fallen by 30% in the last year and, with the supermarket sector likely to become more competitive over the medium to long term, its profitability is likely to come under pressure.
While this may cause a further deterioration in Woolworths' share price in the months ahead, for long term investors it remains a hugely appealing stock. That's because it has a yield of 5.7% and has a track record of increasing dividends by 10% per annum in the last decade. Furthermore, Woolworths trades on a P/S ratio of just 0.51, which is considerably lower than the sector's P/S ratio of 0.66 and indicates that an upward rerating is very much on the cards.
