Cobham plc Shares Surged 100%… And I Totally Missed It

A contrarian viewpoint, and buying at such prices, can lock in very tasty returns, like those once on offer at Cobham plc (LON:COB).

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

In late 2012, the price of Cobham (LSE: COB) shares slid to 166 pence — roughly half the level that they’ve been trading at recently.
 
Despite being largely an aerospace and engineering business, the company — and its share price — had survived the recession in good shape, escaping the meltdown that laid low the likes of GKN and others in the sector.
 
So what brought about the late-2012 slide in Cobham’s share price? Worries about defence budgets here and in America, in short, coupled to fears of a looming ‘budget sequestration’ — automatic spending cuts imposed by America’s Congress.
 
Yet consider the outcome. The defence cuts went on to occur, as did the budget sequestration. But Cobham’s share price simply shrugged off these events, and — as I say – surged 100% over the following one-and-a-half years.

My bargain buy for this week is…

As I’ve written before, I’m still kicking myself that I didn’t buy Cobham back then. Not for the capital growth I missed out on, but for the opportunity to lock in an attractive (and growing) income at an eye-wateringly low entry point.
 
My only consolation: in this market, it seems that there’s never too long to wait for the next opportunity to grab some decent stocks at giveaway prices.
 
Recently, for instance, I topped-up on pharmaceuticals giant GlaxoSmithKline, its price depressed following an earnings report last week, and its tribulations in China.

Markets hate uncertainty

The moral in all this? Simply this: the stock market hates fear, doubt and uncertainty. And when it encounters them, it often reacts by marking down the share prices of businesses affected by such contagion.
 
As Warren Buffett has observed:
 
“You pay a high price for a cheery consensus.”
 
Yet for investors prepared to take a longer-term view, the simple fact is that these markdowns often overstate the risks that are involved.

Put another way, if you judge a business on its fundamentals, rather than on froth and speculation, then there are decent returns to be had by buying-in at just these moments.

Gasping for a fag

Super-investor Neil Woodford, for one, is expert at doing this. Fifteen years ago, for instance, the world’s stock markets had pretty much written off tobacco companies.
 
Not Mr Woodford, who bought into British American Tobacco, for instance, at a price-earnings ratio (P/E) of around 7, equivalent to a share price of around £4. Today, the price is around £36, and the annual dividend has climbed from 35 pence to 142 pence.
 
Today, the market is more sanguine about whopping great law suits, but worried about declining tobacco sales, and the rise of the e-cigarette. Tobacco companies are once again under something of a cloud.
 
But is Mr Woodford worried? No: British American Tobacco is the third-largest holding in his new fund, closely followed by arch-rival Imperial Tobacco. The two together make up 11.5% of his holdings.

Think the unfashionable

Healthcare is another perennially beaten-down sector. As I’ve said, I’ve been topping up my Glaxo holding, and Glaxo and AstraZeneca are Mr Woodford’s two largest holdings, together accounting for 15.4% of his new fund.

As with tobacco, his taste for the sector goes back a long way. Back when the market had largely written off AstraZeneca, Mr Woodford was prepared to look at the fundamentals of the business, and reach a different — albeit unfashionably contrarian — conclusion.
 
As he told the Daily Telegraph earlier this year:

“The market valuation implied that Astra would never develop another successful drug. But it spends billions of pounds on research and development — and I don’t believe that all this money is being wasted. But because the share price had fallen to ludicrously low levels, I wasn’t even taking a risk when I bought the shares: the cash that Astra’s existing drugs were generating was enough on its own to provide a decent return on my investment.”

You heard it here first: bank shares to be hammered

What to make of all this? Simply this: on top of the normal tendency for shares — and sectors — to go in and out of fashion, it only takes a whiff of material uncertainty for shares and sectors to get a hammering.
 
At present, for instance, markets are mulling the impact of the competition inquiry into banks that has been recommended by the Competition and Markets Authority. It could — worst case — even involve some of the UK’s banks being broken up.
 
Needless to say, there’s been a shift in sentiment towards banking shares. And it’s a shift in sentiment that I expect to get much worse, should the full review go ahead.
 
Even global banking giant HSBC has been caught up in the down-rating, despite only around 5% of the overall bank’s profit being generated by its UK operations.

So needless to say, I’ve been buying. And so, it seems has someone else — Neil Woodford, who famously ditched all his banking holdings before the credit crisis.
 
To Mr Woodford, banks may have been “uninvestable” back then — but in HSBC’s case, that’s no longer the case, it seems.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Malcolm owns shares in GKN, GlaxoSmithKline, AstraZeneca and HSBC. The Motley Fool has recommended shares in GlaxoSmithKline

More on Investing Articles

Photo of a man going through financial problems
Investing Articles

Is a stock market crash coming? And what should I do now?

Global investors are panicking about a new US stock market crash in the days or weeks ahead. Here's how I'm…

Read more »

Investing Articles

FTSE shares: a brilliant opportunity for investors to get rich?

With valuations in the US looking full, Paul Summers thinks there's a good chance that FTSE stocks might become more…

Read more »

Growth Shares

2 FTSE 100 stocks that could outperform the index in 2025

Jon Smith flags up a couple of FTSE 100 stocks that have strong momentum right now and have beaten the…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

1 stock market mistake to avoid in 2025

This Fool has been battling bouts of of FOMO recently, as one of his growth shares enjoys a big bull…

Read more »

Investing Articles

2 no-brainer buys for my Stocks and Shares ISA in 2025

Harvey Jones picks out a couple of thriving FTSE 100 companies that he's keen to add to his Stocks and…

Read more »

Number three written on white chat bubble on blue background
Investing For Beginners

3 investing mistakes to avoid when buying UK shares for 2025

Jon Smith flags up several points for investors to note when it comes to thinking about which UK shares to…

Read more »

Investing Articles

Will the rocketing Scottish Mortgage share price crash back to earth in 2025?

The recent surge in the Scottish Mortgage share price caught Harvey Jones by surprise. He was on the brink of…

Read more »

Investing Articles

2 cheap shares I’ll consider buying for my ISA in 2025

Harvey Jones will be on the hunt for cheap shares for his ISA in 2025 and these two unsung FTSE…

Read more »