There was 25% off my favourite coffee this week. I bought a packet two, actually. I didnt think: Ill hold off, perhaps itll be even cheaper next week. However, when a companys share price comes down, we often um and ah about it, wondering whether we might be able to buy at a still lower price if we wait.
The trouble is, theres no way of knowing what the lowest price will be. But theres no need to be too greedy. Buying good companies that are on sale, because of some macro worries or business stumble, can be highly rewarding, even if you dont get the very lowest mark-down in the sale.
Mining giant Rio Tinto hasnt done a lot wrong under chief executive Sam Walsh, who took the reins in 2013. But the industry is cyclical, and the companys revenue has fallen due to prevailing low metals prices. The shares have been whacked, too. The price reached a post-financial-crisis high of over 46 in 2011; today, you can buy at under 24.
Rio is one of the worlds lowest-cost iron ore producers. By ramping up volumes as it has been doing it can partially offset weak prices. Higher-cost producers cant compete and in time supply will be taken out of the market and prices will rise again.
Rio offers a compensatory 5.9% prospective dividend yield to investors today, who are willing to wait for the cyclical upturn. In fact, earnings declines are expected to bottom out this year, with analysts forecasting low double-digit growth for 2016, putting Rio on a forward P/E of 14 and giving the shares substantial potential upside for the longer term.
Turning to another natural resources industry, shareholders of oil companies havent had much to sing about over the last year, with the dramatic decline in the price of black gold. The share performance of supermajors, such as Shell and BP, has been disappointing enough, but cant compare with the wholesale cratering of share prices seen at companies in the oil equipment and services industry.
Hunting has been one of the hardest hit, mainly because most of its peers have some diversification in other industries. Huntings shares were trading not far off 9 last summer, but are changing hands for less than 5, as I write.
Earlier this month Hunting reported a 76% decrease in profit from operations in the first five months of the year, and analysts see little improvement through to the end of the year. However, forecasts are brighter for 2016 to the extent that Hunting trades on a price-to-earnings growth (PEG) ratio of just 0.3. With a PEG of 1 indicating fair value, Huntings rating implies considerable upside potential for the shares from their current level.
One of Britains premier, world-renowned businesses, Rolls-Royce has been in the wars of late. It wasnt so long ago that investors couldnt get enough of the aerospace firms shares, pushing the price up to over 12. As Im writing, the shares are trading at a new multi-year low of under 7.40.
Earlier this month, Rolls-Royce issued a third profit warning in just over a year. The company blamed lower oil prices (its marine division does much business with the offshore oil industry) and order issues relating to the transition from Trent 700 jet engines to the new Trent 7000.
Rolls-Royce is a quality business, and, as the company says, there are drivers for significant revenue growth over the next ten years. Theres an old stock market adage that profit warnings come in threes and, with Rolls-Royce having put three behind it, now could be the perfect time for patient, long-term investors to catch this falling knife.
Many City fund managers are under pressure to deliver relatively short-term performance, and jump ship from troubled shares, providing opportunities which private investors with a longer horizon can take advantage of. Indeed, here at the Motley Fool we believe you can aspire to build yourself a 1 million portfolio.
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G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.