With the recent volatility being experienced in the market, investors will be presented with new opportunities for their portfolios. Share price movements have been extreme in some cases and this can be looked at in two ways – there is either an underlying problem with the business or the market has over-reacted to short-term news.
Here are three stocks that have experienced significant declines in value over the past few months and some investors might be thinking now could be a good buying opportunity:
1. Iluka Resources Limited (ASX: ILU) – The mineral sands producer was once a market favourite but a combination of lower commodity prices and reduced demand from its key markets has seen the share price decline by more than half over the last three years. China and Europe are Iluka's most important customers and fears of further slowing of the Chinese economy and uncertainty in the Eurozone have seen the share price fall by more than 20% over the last month.
Compounding the situation for Iluka is the massive plunge in the iron ore price over the last year. Iluka is entitled to royalties over BHP Billiton Limited's (ASX: BHP) Mining Area C and around 25% of the value of Iluka is related to the royalties it receives from the iron ore mine.
The outlook for the mineral sands and iron ore market is still unclear and Iluka is unlikely to recover until at least FY17. I think there are better opportunities for investors who have limited positions in their portfolios.
2. Sigma Pharmaceutical Limited (ASX: SIP) – Sigma's share price has fallen by around 25% since hitting its 52-week high of $1.01 in late March. Although Sigma was once focused primarily on wholesale distribution, it is now growing its presence in the retail pharmacy market through the Amcal and Guardian brands. The valuation and dividend may look attractive at the current share price but Sigma faces a number of headwinds going forward.
Pharmacy chains like Chemist Warehouse are developing their own distribution chains that make them less reliant on wholesalers like Sigma. In addition to this, some manufacturers like Pfizer are by-passing wholesalers all together and selling their products to pharmacies directly.
The other major issue for Sigma is the number of drug molecules that are subject to price cuts over the next five years. The government has announced more rapid price cuts to molecules that are subject to price disclosure and this has seen the value of most molecules fall significantly. The result is essentially price deflation and this will make it hard for all of the wholesalers to increase their revenues moving forward.
3. Ansell Limited (ASX: ANN) – The medical and protective equipment provider has outperformed the broader market over the past year but is now trading well below its 52-week high. Ansell has maintained steady growth during the past three years largely through acquisition and new product developments. It has exposure across multiple continents and provides investors with a defensive investment in the healthcare sector. Ansell has just announced a cost-cutting program aimed at increasing efficiency throughout the group.
Ansell shares are currently trading at around 15x FY16 earnings but I would like to see further falls in the share price before taking a position. Growth is expected to moderate over the short term but new acquisitions and products could help to drive growth in the longer term. I will be keeping a close eye on Ansell for any further weakness.
Although volatility can create opportunities, investors should be selective in those opportunities. The Motley Fool has a stunning opportunity that you can buy NOW!
