Investors often watch the market with great trepidation, experiencing feelings of exuberance on the slightest whiff of upside and allowing the panic to take over on days where the market is nobody’s friend.
Indeed playing the markets on a day to day basis can be a tough game, so much so that iconic investor Warren Buffett felt compelled to tell investors to focus less on daily fluctuations and instead look to the underlying value.
Of course, if a company makes a price sensitive announcement, or if you discern potentially severe headwinds brewing, it is always wise to evaluate the new information carefully. This assessment may lead you to cut your exposure, sell out completely, do nothing, or view the resultant movement in price as an opportunity.
For investors looking to play the long game, such periods of volatility can offer up some potential profitable opportunities, if your assessment of the company in question results in the continued strength of its value proposition.
If you’re thinking about a long-term buy and hold strategy, here are three stocks to consider for your portfolio.
Telstra Corporation (ASX: TLS)
Given the rise of the internet savvy device (included in this category are watches, phones, tablets, laptops, glasses and all the in-betweens) and a growing trend towards working in “the cloud”, there seems to be a strong pipeline of demand for Telstra’s not inconsiderable services.
Australia’s largest telco is currently trading at a touch over $5, giving it a market capitalisation of $62.34 billion and a price to earnings ratio of 15.9 times. Although this doesn’t strike me as a bargain, its current dividend yield of 5.7% is looking not too shabby against today’s current bank deposit rates and given Telstra’s potential for growth ahead, this could be a great play in a market that is sometimes overly focused on the short-term sprint.
BHP Billiton (ASX: BHP)
BHP’s share price currently sits at just over $35 and is down 6% since the start of 2014, giving it a price to earnings ratio of 14.3 times and a dividend yield of 3.3%. The “world’s leading diversified resources company” recently took a beating on the back of a significant drop in iron ore prices. Although the company has been penalised heavily, along with other iron ore miners, its saving grace is a strategy that aims to diversify, with recent announcements indicating a stronger focus on investment in potash (a primary ingredient in fertiliser), even contemplating that this might be a fifth pillar to add to its “four pillars policy”.
In addition to metallurgical coal and iron ore, BHP now counts petroleum, copper and potash as other important areas of its business. Despite this positive aspect, BHP’s share price of $35.50 seems to be a risky proposition, especially in light of the recently bearish view being put forward on iron ore prices.
Setting aside the short term fluctuation in iron ore prices, I view BHP’s business to be a positive one given its focus on efficiencies and productivity (the company is targeting internal rates of return of above 20% for its major projects), diversification strategy, dominant industry position and one of the lowest iron ore break even prices, second only to Rio Tinto (ASX: RIO) at around US$45 per tonne.
BHP may also benefit from a falling Australian dollar should the iron ore price fall out of bed. Although it is difficult to estimate fair value, other Fools would consider buying BHP at $25 per share. In short, I believe that BHP has a strong value proposition in the long term, although the current risk inherent in a reduced iron ore price deserves some serious consideration.
Australian Agricultural Company (ASX: AAC)
A fast-growing and increasingly wealthy emerging markets population is increasing the demand for food products. One company to benefit from this future trend is AACo, Australia’s largest beef cattle producer.
Despite recent issues around live cattle export bans, management changes and adverse weather conditions leading to net losses, AACo has regrouped and focused its attention on the burgeoning Asian markets, and is currently in the process of completing its beef processing facility in Darwin (expected to be completed by end of 2014).
Interestingly, the company has attracted some high profile investors amongst its substantial shareholder ranks such as billionaire investor/trader Joe Lewis, who holds 19.99% (plus a further 1.8% in equity derivatives and a convertible bond that would equate to around 8% of the company’s total issued equity), and an IFFCO/FELDA joint venture that owns just under 10%.
The company’s recent $1.25 share price (equating to a market capitalisation of $676 million) compares favourably to a net tangible asset valuation of $1.44 per share, indicating that AACo could be undervalued, at least on one metric.
Playing the long game can offer many benefits for investors who are cognisant of a company’s underlying value. As Buffett says, “the best thing that happens to us is when a great company gets into temporary trouble…We want to buy them when they’re on the operating table.”
BHP and Telstra offer a number of redeeming qualities, including their dominant market positions and alignment to growth industries, which lead me to conclude that a long-term value proposition exists (with a few cautionary caveats in BHP’s case). Although AACo is a much smaller company, it could have a bright future ahead with strong demand for beef products coming from emerging market economies developing in line with their growing income levels. As they say, slow and steady wins the race.
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Motley Fool contributor Sid Narsey does not own shares in any of the companies mentioned in this article.