The question that is likely to be dominating investors’ minds this week is whether the Macquarie Group Ltd (ASX: MQG) plunge represents a buying opportunity.
The MQG share price crashed 5.4% to $128.81 on Friday – making the stock the second worse performer on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) with the JANUS/IDR UNRESTR (ASX: JHG) share price taking the wooden spoon as it tumbled 12.1% to $30.96 and the Bravura Solutions Ltd (ASX: BVS) share price in third spot as it declined 4.8% to $5.94.
It’s rare to see Macquarie among the biggest losers and it’s even rarer for the investment bank to issue what is in effect a profit downgrade.
De facto profit downgrade
It’s almost unthinkable that the “Millionaires Factory” could disappoint the market given its long track record of under promising and over delivering.
But disappoint is what Macquarie’s CEO Shemara Wikramanayake did when the bank revealed that FY20 earnings is likely to be lower than this financial year even though FY19’s near $3 billion record profit was a little ahead of consensus.
That won’t stop a wave of downgrades from brokers given that consensus forecast was tipping around a 5% increase in earnings per share in FY20.
This has left investors pondering whether they should buy or sell the stock next week. The answer is probably both, in my view.
Is the stock cheap?
The thing is, Macquarie’s share price looks attractively priced to me at around current levels. I don’t think management has given up on its under promise and over deliver mantra, and that means FY20 is more than likely to be better than the “slight” profit drop for that year (barring a Black Swan event).
If earnings come in the same as FY19, this would put the stock on a price-earnings multiple of 14.5 times. That’s about in line with the ASX 200.
Some might say that doesn’t make Macquarie cheap, but shares in well run companies with a solid track record seldom are.
I suspect we will see Macquarie’s share price trading closer to $150 than $100 by year end unless we get a long and sustained global market downturn.
Timing the entry
On the other hand, right now may not be the best time to buy the stock – not if you believe our market will suffer a pull back as it normally does in May and June.
There are many theories about why markets trade backwards during this period in most years, and I won’t delve into why in this article. But I will say that I suspect the trend will be evident this time because global share markets have been running hot since the start of the year and are trading at relatively lofty valuations.
Meanwhile, earnings growth in both the US and here haven’t been keeping pace – at least not enough to justify the market powering higher without the need for a breather.
If we do experience weakness in the coming weeks, Macquarie’s shares will suffer more as it is a high beta stock. I would wait for the drop before adding to my position.
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Returns as of 6th October 2020
Brendon Lau owns shares of Macquarie Group Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Bravura Solutions Ltd. The Motley Fool Australia has recommended Bravura Solutions Ltd and Macquarie Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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