During the last three months, the ASX has lost around 9% of its value. The reasons for that are clear: the potential for a slowdown in China, the prospect of a recession in Australia and continued falls in commodity prices.
Clearly, investing at the present time may be viewed as a rather risky business and, in the short run at least, further volatility appears set to be a feature of the coming months. As a result, share prices may decline further in the next few months – especially if the interest rate falls from earlier in the year fail to have a noticeable impact following their time lag.
However, now could be a great time to buy shares and, in reality, a less risky opportunity to do so. That's because the market is already pricing in further problems and, therefore, there are wider margins of safety on offer for investors. This means that the risk/reward ratio may be more appealing than it was a few months ago, potentially leading to higher gains in the medium to long term.
One stock which has endured a troubled last three months is BHP Billiton Limited (ASX: BHP). Its shares are down 16% in that period and, looking ahead, the company's outlook is rather downbeat. For example, its bottom line is expected to fall by 62% in the current year, which comes after a 35% fall last year. And, with commodity prices having a realistic chance of falling, BHP's future prospects could be downgraded.
However, now could be the perfect time to buy BHP. It is doing all of the right things as a business in terms of restructuring via the spinning-off of non-core assets, cost reduction, driving through efficiencies and increasing production levels. This looks set to put it in a stronger position relative to its peers in the longer term and could equate to higher market share. Furthermore, with earnings due to rise by 36% next year, investor sentiment could begin to pick up, too.
Similarly, electrical goods retailer, JB Hi-Fi Limited (ASX: JBH), has seen its share price fall by 12% in the last three months. And, with the outlook for consumer confidence being rather pessimistic, spending levels on discretionary items (such as electrical goods) could come under pressure, leading to downgrades in JB Hi-Fi's sales and profitability forecasts.
However, much of this appears to be priced in. For example, JB Hi-Fi trades on a price to earnings (P/E) ratio of 13.2, which is lower than the ASX's P/E ratio of 14.9. Furthermore, it has a price to sales (P/S) ratio of 0.5 versus 0.74 for the wider retailing sector. And, with JB Hi-Fi having increased its earnings by 21% per annum during the last ten years, it has an excellent track record of delivering growing profitability which should provide its investors with confidence in its future prospects.
Meanwhile, property company, Goodman Group (ASX: GMG), has posted a fall in its share price of over 9% in the last three months. Still, the company's shares are up by 70% in the last five years, during which time it has increased earnings per share at an annualised rate of 6%. And, looking ahead, profit growth of over 6% per annum is being forecast in the next two years which, alongside a yield of 4%, makes Goodman Group an appealing buy at the present time.
Certainly, its price to book (P/B) ratio of 1.41 may be ahead of the ASX's P/B ratio of 1.21 but, with such a reliable track record and bright future prospects, it seems to be well worthy of an even larger premium to the wider index.
