No matter how many times I look at this market, I can't escape a simple conclusion – short of a full global meltdown that ends with us living in caves, there are many companies on the ASX today trading at unreasonably low valuations.
In short – shares are cheap.
I'm not saying every company is cheap, and I'm certainly not in the forecasting business, so I have no idea when they'll bounce back. Indeed, prices could languish for months before attempting any sort of recovery.
Regardless of how long it takes for prices to return to more reasonable levels, I am firmly convinced that today's prices represent some great buying opportunities. Some of you will have a double-take at this point – how can I not care how long the share price recovery will take?
It's the right question – and the answer is two-fold. Firstly, if you buy shares at a very attractive price, the eventual return to more normal values (assuming that return eventuates) should compensate you for waiting patiently. Secondly, depending on which companies you invest in, dividend yields can go a long way towards providing solid returns even before capital gains are considered.
As a rule, I tend to be almost fully invested most of the time. As Peter Lynch wrote, I'd rather be caught with my pants up when the market jumps. At the moment, all of my available cash has been committed to the market, and my only regret is that I don't have more to invest at these prices (although I'm comforted that I've put much of my cash to work over the past two years at attractive prices).
Of the top 300 ASX shares by market capitalisation at the end of last week, one in ten was within 5% of its 52-week low. Among them are companies in difficult industries, such as Air New Zealand (ASX: AIZ) and Pacific Brands (ASX: PBG), who were both trading right at their 12-month lows, but also top quality businesses such as BHP Billiton (ASX: BHP) and Woolworths (ASX: WOW).
In fact, those 31 companies are an impressive cross-section of corporate Australia – showing the indiscriminate nature of the pessimism in today's market, but also a glimpse of the value on offer. Add names like funds manager Perpetual (ASX: PPT), insurer Insurance Australia Group (ASX: IAG) and plumbing supplies business Reece (ASX: REH) to BHP and Woolies and you have 5 companies that wouldn't be out of place as the core of any portfolio.
On top of their business quality and earnings power, BHP is trading at a trailing dividend yield of almost 3%, and is the scrooge among this group on that measure, with Woolworths offering 5%, IAG 5.7% and Perpetual 9.5% – and each is fully-franked.
It's a core that you'd otherwise be happy to acquire over time, hoping that dollar-cost averaging would deliver a reasonable cost base for your portfolio. It's rare indeed that such a high quality quintet is available around 12-month lows at the same time.
Another 50 companies were between 5% and 10% off their 52-week lows, a group which includes Commonwealth Bank (ASX: CBA), ANZ (ASX: ANZ), Westpac (ASX: WBC) and Westfield Group (ASX: WDC) – another blue-chip selection.
52-week lows don't, by themselves, signal that now is the time to buy. Many shares will set new low after new low and there's no joy to be had from trying to catch a falling knife, while others may be at a 12-month low point simply because the market got ahead of itself and overpriced the shares during the past year.
But when quality businesses such as the ones listed above are selling at year-lows, it's hard not to get very interested, especially when shareholders are being paid well to wait for the share price to improve.
One of the hardest tasks in investing is having the courage of your convictions while everyone else is taking a different view. If you're right, it can also be one of the most rewarding things you can do to build long term wealth. It's hard to escape the view that for quality shares, this might be one of those times.
Scott owns shares in Pacific Brands, Woolworths and Westfield Group. 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.