To say the market has been volatile over the past several weeks would be an understatement. It appears as though all momentum has been lost and the market is reacting irrationally to news on a daily basis.
Investors are seeing exaggerated share price movements when companies release market sensitive information and when the news is bad it seems there is no place to hide.
Over the last week, shareholders of Flight Centre Travel Group Ltd (ASX: FLT), SEEK Limited (ASX: SEK) and Slater & Gordon Limited (ASX: SGH) have seen the value of their shares plummet based on various market announcements. All three companies have been strong performers in the past, so is now a buying opportunity or a sign of more bad news to come?
Flight Centre
Australia's largest travel company was once a market favourite but over last 12 months investors have lost some confidence with the company's outlook. Flight Centre announced a profit downgrade early last week caused by slowing growth in the Australian leisure market and rising costs. Although its international business is performing strongly, the Australian market is still the largest contributor to Flight Centre's earnings and investors punished the stock.
Unless consumer sentiment improves, the short-term outlook appears challenging but there is still a lot to like about the long term growth prospects for Flight Centre. Earnings are projected to be slightly lower this year but the company is expanding into new markets that should drive future growth especially in overseas markets. The company also has a cash balance of more than $500 million that it can use for potential acquisitions or capital management initiatives.
The 20% share price decline over the last week has seen Flight Centre trade on a price-to-earnings (P/E) ratio of less than 14 and delivering a fully franked dividend yeild of around 4.5%. I took the opportunity to buy a parcel of shares last week as I believe the market has over reacted to short-term bad news.
SEEK Limited
$650 million worth of market capitalisation was wiped off Australia's leading jobs site company last week as problems in its Learning division resulted in a profit downgrade. SEEK is now forecasting second half earnings to be broadly the same as the first half and also is expecting below average growth in FY16 as a result of increased competition, reforms in the education sector and aggressive re-investment across the group.
With the shares trading at a premium to the broader market, investors obviously had much higher expectations and the shares were beaten down heavily. Although SEEK is the clear market leader with numerous competitive advantages and a strong history of growth, I still think investors may have better opportunities elsewhere. The shares are still trading at a P/E ratio of around 25 and any further disappointing news will see the shares come under further pressure.
Slater & Gordon Limited
The announcement that the UK's financial watchdog would be investigating the activities of Quindell Plc, saw the share price of Slater & Gordon get punished. Australia's largest listed legal firm recently purchased part of the Quindell business for $1.2 billion and the announcement of the investigation fuelled further scepticism about the acquisition.
Worryingly for shareholders, the share price had already fallen by more than 5% the day before the announcement was made and it appears short sellers may be exacerbating the situation with the number of short positions increasing dramatically over the past couple of weeks.
While it is too early to tell if there will be any material impact on Slater & Gordon's future earnings from the investigation or whether the acquisition will be beneficial to shareholders, it appears the market has already priced in the downside risk.
The company is still forecasting strong earnings growth and the shares are currently trading on a P/E ratio of around 15. With the uncertainty of the acquisition in mind, I think the current share price is attractive for investors who are willing to take a long-term view and tolerate some volatility in the short term.
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