The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get-rich-quick adventurer. – Jesse Livermore.
In his investment classic Reminiscences of a Stock Operator (1923) Edwin Lefevre said the hardest thing in investing is simply the ability to sit still – but only if you're reasonably sure your logic is on the right track. Although published as a work of fiction Reminiscences of a Stock Operator is believed to be the biography of the buccaneer investor Jesse Livermore who made and lost several fortunes before shooting himself in a hotel cloakroom in 1940. He died penniless and feeling worthless.
The sad thing about Jesse Livermore is his investment principles were sound – be patient; do your research; hold your positions if long-term prospects are positive; never be greedy when buying / selling; respect the market but don't be governed by it, and most of all always follow your own path. His major successes came when he heavily shorted railroad companies (today's equivalent: overblown tech stocks) and then the Dow Jones in 1928.
In between however he frequented bucket shops (today's equivalent are internet gossip forums) and whittled away his fortune on impulse buys. The mistake was forgetting his principles amid the excitement.
With the market now entering a downward phase, perfectly justified by historically low returns on equity and earnings growth falling behind price growth – perhaps it's time to take a look at some shares that are approaching interesting valuations.
I personally favour companies which have invested heavily in the areas they're good at and have strong earnings growth prospects. Here are three of them.
Ardent Leisure Group (ASX: AAD) has operations in health clubs, theme parks, marinas and bowling alleys. In the last couple of years they have entered the U.S. market and are having great success with Main Event – a string of affordable family entertainment centres which offer customers a good time out. Now comprising 15 centres with another five under construction, Main Event is a key growth driver for this company, as is a falling A$. Now selling at $3.10, I would prefer to see $2.80 before investing further.
Credit Corp Group Limited (ASX: CCP) is in the receivables management (debt collection) industry and has maintained double-digit profit growth annually over the past decade. It also has a start-up operation in the U.S. where patience will be required. Looking to the future a new consumer lending division was established recently and indications are this will become a major profit contributor over the next few years.
Management estimates 2015 will see earnings per share come in around 80c and the dividend will be a franked 40c. This places Credit Corp on an indicative 2015 price earnings ratio of 12 and a yield of 4%. Good value now, in my opinion.
Legal firm Slater & Gordon Limited (ASX: SGH) has expanded aggressively into the UK and this market offers significant scope for further growth. To date acquisitions have been integrated smoothly and Slater & Gordon's share of the UK market is now in excess of 5%. Although some analysts have queried why cash flow trails earnings this is standard for professional service firms due to case outlays and non cash movements in work in progress.
At $6.07 Slater & Gordon sells at 17 times 2015's projected earnings with a 2% dividend. Given its growth profile I don't think Slater & Gordon is excessively priced, but would prefer a figure below $5.80 before buying more.