Trying to predict the future is not a strategy for profit opportunities right now – as John Maynard Keynes said, "The market can stay irrational longer than you can stay solvent".
He could have been describing the past couple of weeks. No one can predict this irrational bear market at this point in time and trying to do so will get you in trouble, but that doesn't mean there are no profit opportunities. Far from it.
Falling share prices create myriad windows for intelligent investors. It just takes a different mindset and continued vigilance.
Trading on events
Takeovers are the order of the day for cashed up buyers. The tightest credit crunch in history has constrained access to low cost finance, but if a company has been hoarding cash then this is a unique profit opportunity. As reported by the Australian Financial Review, the chair of BHP Group Ltd (ASX: BHP) recently made it clear they would be surveying the market for opportunities.
Investors make money on takeovers via arbitrage – that is, buying a share for a price under the offer price. This approach has significant risk but carries significant upside if you can pull it off.
A recent example of this is the current non-binding, indicative offer from Nord Gold for ASX gold explorer Cardinal Resources Ltd (ASX: CDV). At the time of writing the offer carries a premium of 53%.
Buying for dividend yield
Today is the last day to purchase Unibail-Rodamco-Westfield (ASX: URW) to capture a dividend yield sitting at 5.1%. If you own these shares before the ex-dividend date, Tuesday in this case, then you definitely get paid the amount. It is the closest the market has to a sure thing.
Practices like dividend harvesting also carry some risk, particularly in today's bear market. It's important that in every single trade you try to understand the upside as well as the downside and only invest if you are comfortable with the potential pitfalls.
Long term profit opportunities
The S&P/ASX 200 Index (ASX: XJO) has its fair share of world class companies. However, for all the wailing and gnashing of teeth, many of the blue chip companies are still at unacceptably high earnings multiples.
That being said, profit opportunities still exist if you look for them. BHP is the world's largest mining organisation. BHP shares are down 30.6% since the start of the year. The mining giant currently has an earnings multiple of 8.7, which is way under its average 10 year P/E of 12.9.
Just under the large cap ceiling, opportunities abound. Yancoal Australia Ltd (ASX: YAL) shares have fallen by 29.7% since the start of the year and are now trading at an earnings multiple of 3.7. The great retailer JB Hi-Fi Limited (ASX: JBH) is trading at a P/E of 12.2 after a share price fall of 27.7% this year. In addition, the share price of pioneering buy now, pay later facilitator Afterpay Ltd (ASX: APT) is down 39.3% since 1 January.
Foolish takeaway
None of these strategies require any particular ability to tell the future. They just require a workman-like approach to uncovering profit opportunities amid the wreckage. A good company today is still a good company if the only thing that has changed is its share price.
