Identifying quality companies with great potential should be easy enough for most investors, in fact often therein lies the problem. The seductive pull of anticipated growth means investors will often bid the price of companies up so high that future returns have nowhere to go but sideways, or worse, down.
Just as the market’s wild enthusiasm for some stocks can create a phenomenon where no price seems too high, sometimes negative sentiment can create opportunities around quality businesses in which investors have temporarily lost faith. Here are some well-established businesses that may be available at bargain prices.
Metcash Limited (ASX: MTS) is the group behind supermarket brands and liquor stores like IGA and the Bottle O. It has been attempting to fight the supermarket duopoly of Woolworths Limited (ASX: WOW) and Wesfarmers Ltd (ASX: WES), but the competitive intensity and benign macro-environment have proven strong headwinds recently. Price discounting by rivals has forced Metcash to cut its own prices, damaging margins and profits even though revenues or sales continue to grow.
Based on forecast FY 2014 earnings per share the group trades on a price-earnings less than 10 and on a fully franked forward dividend yield of approximately 6.6%. It won’t take much for Metcash to turn a corner and at $3 a piece, the shares look a bargain.
AMP Limited (ASX: AMP) is another business that has been down in the doldrums of late. While rival diversified financial services provider Perpetual Limited (ASX: PPT) has doubled its value in less than two years, after undergoing a radical overhaul, AMP remains stuck in first gear. The group is currently trading at prices more than 25% below Morningstar’s fair value estimate of $5.50 and is offering up a partially franked dividend yield of around 5.6% based on FY 2014 forecast earnings. With a financial-year ending 31 December, AMP will be reporting its full-year results in less than three weeks’ time on 20 February, 2014. Any sign of a turnaround and today’s investors can expect handsome profits.
Drillsearch Energy Limited (ASX: DLS) is an oil and gas explorer plying its trade in the resource-rich Cooper Basin. The business is on a roll and this week announced it expects to produce between 3 million to 3.3 million barrels of oil equivalent for FY 2014. That’s around triple what it produced last year. Some of the additional revenue generated will be reinvested in an active exploration and development program to drive growth. The company announced second-quarter revenues of $111 million this week and its current price-earnings ratio around 13 looks reasonable given the promising growth profile.
There’s no short cuts to investing success, but identifying quality companies at good prices is a great starting point. Sometimes undue market pessimism around businesses offers up this starting point, and that’s when investors should look to take advantage.
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Motley Fool contributor Tom Richardson owns shares in AMP and Metcash. You can find him on twitter @tommyr345