Wild swings in share prices do not translate into wild swings in the underlying value of a business. They only matter if you’re sucked in to buying or selling at those irrational prices. The wise investor will happily sit back and do nothing until the prices being offered by the market become attractive enough to entice her to either buy or sell.
In its more rational moments, the share price of a company should approximate its underlying value. When fear creeps in to the market’s collective psyche, however, opportunities start to appear as investors head for the exits.
At these times, across the board selling impacts even the highest quality businesses – sending share prices down to levels unseen in years. (Of course, the reverse is also true when the market is exuberant – and investors do well in those times to keep their powder dry.)
Don’t be paralysed by uncertainty
In one corner, some commentators would suggest that investors do nothing in periods of uncertainty, advising investors to wait and see what the market will do next. In the other corner is Warren Buffett. In the words of the master investor, “you pay a very high price… for a cheery consensus” – by the time certainty appears, share prices will have already seen significant gains.
I’m siding with Buffett. In a pessimistic market where the selling has seemingly spared no company, investors have the opportunity to pick up great companies at good prices. I’ve already taken my own advice and have been buying shares of Woolworths (ASX: WOW) , QBE (ASX: QBE) and Buffett’s US-listed Berkshire Hathaway – each of which has been trading at prices not seen in years, and which, in my view, undervalue the strength and potential of the business.
Quality always wins
The continued pessimism is also weighing on the share prices of other quality businesses. Many companies have seen their prices fall to attractive levels recently. Going no further than the third letter in an alphabetised list, we find a trio of Australian businesses which have been among our most impressive export successes in recent years.
Global leaders – and world beaters
As the name suggests, Cochlear (ASX: COH) develops and sells devices to assist people suffering from hearing loss. A global market leader, Cochlear continues to innovate, delivering record sales in a market that continues to grow as it moves into different technologies and geographic markets. Cochlear is the most expensive of the three featured here when measured on a price/earnings ratio basis, but the price is around the same as it was 18 months ago, and the company continues to justify its higher P/E with ongoing growth.
Still in the medical field, blood products company CSL (ASX: CSL) is a truly global force. Lead by long-time CEO Brian McNamee, the company has a long record of growth, supplying much needed products to a global market and with increasing investment in research and development. CSL has a defensive revenue stream, offers a trailing dividend of almost 3%, and an undemanding price for earnings of this quality.
While not a household name, Computershare (ASX: CPU) is a name that should be familiar to most investors. Computershare provides share registry services to companies listed on stock exchanges around the world. Using its core competency of records management and communications, the company has also moved into managing rental bonds and other financial services as it has expanded internationally. While some of its revenue is hostage to the fickle nature of stock market listings and takeovers, Computershare is well placed to grow into the future, and is currently selling at an undemanding price for such a quality business.
When investors are fearful, the selling can be indiscriminate. Some of it is justified, as investors come to appreciate the inherent risks in companies with too much debt, unproven business models or non-existent competitive advantages.
For other businesses, the market is simply under-appreciating and under-pricing the quality of the business and the likelihood of longer term success.
Taking the time to create a watchlist and having the patience to wait for an attractive price can be two of the most important ways to prepare yourself for success. Cochlear, CSL and Computershare are three proven performers– and worthy of further consideration at current prices.
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Scott Phillips owns shares in Woolworths, QBE and Berkshire Hathaway. This article has been authorised by Bruce Jackson. The Motley Fool has a mighty fine disclosure policy.