Here come the Buys
Halloween might be over but senior analyst James Greenhalgh is feeling the sugar rush of better buying opportunities ahead.
We advocate patience. Attractive, high-quality stock ideas come to those who wait. But we admit it's not been easy - for most of 2018 the pickings have been slim as quality stocks have levitated.
Over the past two months all that has changed. Recent market declines show how buying opportunities can appear much more quickly than you expect.
The All Ordinaries index peaked at 6,460 right at the end of reporting season in August. Since then it has fallen 8%.
It isn't much, but it masks larger falls in many stocks. Many high-quality companies that were formerly trading on ritzy multiples now look much more reasonable.
Take plumbing supplies group Reece (ASX:REH). In late August the stock was around $12.50 following the acquisition of US plumbing business Morsco in July. But the market wobbles - and an announcement that first-half earnings will likely be slightly lower than expectations - mean the stock has fallen about 15%.
Carsales.com (ASX:CAR) has fallen even further, down more than 20% over the past two months. The company recently reported that earnings growth was likely to be 'moderate' this year rather than 'solid'.
Bad news has also afflicted online real estate classifieds business Domain Holdings (ASX:DHG). Weak listings in Sydney and Melbourne mean earnings won't grow much in 2019. The stock is down 30% from its late September peak.
There are plenty of other examples. Fibre cement manufacturer James Hardie (ASX:JHX) has fallen 20% since its 2018 peak. Even Wesfarmers (ASX: WES) has given up some of the gains it made following our upgrade to Buy in April this year. (Look out for our Buy price for Coles in an upcoming review of its demerger).
Each one of these stocks is now much closer to our Buy prices. Indeed, some of them are barely cents away. To see which ones, and our existing Buys, subscribe (if you're not already a member).
If you expect to continue buying stocks over your lifetime, these lower prices are great news. A high-priced market might make your portfolio look good for a while, but you need lower prices occasionally to put additional capital to work sensibly.
It's why I'm more excited about potential buying opportunities in a wider range of stocks than I have been for some time. And all we needed was an 8% decline in the All Ordinaries index.
So why is the market down?
It's a natural question to ask when the sharemarket falls. The sharemarket tends to anticipate economic downturns - although the old joke is that it has anticipated nine of the past five recessions.
Truth be told, I am a little worried about the economic outlook in Australia - although I have been for years. I suspect we're in for a lengthy period of weak house prices nationally, perhaps like Perth's experience over the past four years.
This could feed into economic activity - and external shocks could exacerbate any issues. It's why I always have a decent chunk of cash available, although there are different schools of thought on that strategy.
Missing the forest
However you manage the downside risks, though, trying to avoid recessions or market falls means you'll miss the big picture. Buying quality stocks at reasonable prices - preferably on bad news - has been a winning formula for decent sharemarket returns over the long term.
If it sounds simple, that's because it is. Unfortunately we humans overcomplicate things with our emotions and our psychological biases.
We've had a taste of lower prices over the past two months, and I'm hoping for more. After a few years of slim pickings, it's exciting that there are now more prospects for putting capital to work.
Disclosure: The author owns shares in Wesfarmers and Domain.
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