In a world turned upside down, how should investors react? Well, the world hasnt ended so investors, like the rest of us, willjust have to keep on going.
What the panic after the Brexit vote has done is open up many share price opportunities. Stock valuations have been falling across the board. But you have to be careful what you buy and what you sell.
In this article Ill present two companies whose share prices have taken a tumble. Oneis a companyI think you should sell, and the other a firm I think you should buy.
Tesco
The supermarket sector in this country has been transformed in recent years. Once retail leaders such as Tesco (LSE:TSCO) and Sainsbury dominated the market, and made multibillion pound profits year-on-year.
But trees dont grow to the sky. At some point the growth will stop. Tesco has reached that point, as the number of grocery outlets in the UK has reached saturation point. There are simply too many shops in this country, and the growth of competitors such as Aldi and Lidl has added to the over-capacity.
In this situation, the only way to maintain revenues is to cut prices, and this reduces profits. Thats why this once hugely profitable business is now only just breaking even.
A companys share price is determined by its current and future earnings.Thats why Tescos market capitalisation has been on the slide. In the boom years, the stock reached 473p. Its now at a third of that level. But even at 162p, this companyis stillexpensive. The current P/E ratio is 27.73, with no dividend being paid out. The only reason you would buy into this business is if theres a strong likelihood of a turnaround. But that looks unlikely at this point.
Prudential
In contrast, insurance giant Prudential (LSE:PRU) is a firm that has been growing profits steadily since the Credit Crunch.As well as operating in markets such as the UK and the US, ithas a large stake in emerging markets across Asia and Africa where the financial services industry is starting to boom.
The success of this firm has led to a rocketing share price, but a recent pullback has caught the attention of contrarians. Whats more, the current market turmoil has pulled the share price even lower. Yetearnings progressionremains robust. EPS is set to risefrom 52.7p in 2013 to a forecast 129.9p in 2017.
The 2016 P/E ratio now stands at just 10.45, with a dividend yield of 3.35%. In my view, thats great value for a company growing this fast.
The question is, can thefirm maintain this level of growth? Well, at some point the growth will stop, just as happened with Tesco. But were not at that stage yet and with the consumer economy in emerging markets set to storm ahead, I think Prudential could well be a good place to put your money.
Read this if you want to learn more about investing pitfalls
Although we like to hear about all the opportunities that investing provides, it’s also just as important to know about the pitfalls to buying shares that can lie in our way.
That’s why our financial experts at the Motley Fool have written an excellent,no-nonsense guide to the Worst Mistakes That Investors Make, giving you the lowdown on what to watch out for when picking stocks.Just click on this link and it will be dispatched instantly to you, free of charge and without obligation.
Prabhat Sakya 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.
