The recent sell-off in the stock market has presented investors with an opportunity to buy the shares of great companies for less. Unilever (LSE: ULVR), Reckitt Benckiser (LSE: RB) and IG Group (LSE: IGG) are three great companies that have become more attractive, as their valuation multiples have contracted and their shares should continue outperform in a weak market.
Although these three shares have not fallen as much as many other shares in recent weeks, their outlooks remain broadly positive and all three companies benefit from dominant market positions and strong pricing power. Companies with wide economic moats are often worth their premium valuations, and as Warren Buffett once reportedly said: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
Unilever and Reckitt
As Unilever and Reckitt sell non-cyclical consumer products, the shares of both companies tend to be less volatile than most. Shares in Unilever and Reckitt have 5 year average betas of just 0.66 and 0.63, respectively. Beta is a measure of how responsive a particular share is to wider movements in the stock market index, and shares with a beta of less than 1 tend to be less volatile.
Over the past month, shares in Unilever and Reckitt have fallen by 11.0% and 7.5%, respectively. However, much of the falls were due to concerns that growth in sales would slow as competition intensifies as grocery shopping shifts online. Nevertheless, the valuations of both companies look more appealing now and their near term outlooks remain broadly unchanged.
Unilever currently trades with at 20.1 times its expected 2015 earnings, and 18.7 times its expected 2016 earnings. Shares in Reckitt are a little more pricey, as they trade at 24.0 times its expected 2015 earnings, and 22.5 times its expected 2016 earnings. Although both shares are not necessarily cheap, they are unlikely to get much cheaper. This is because their forward earnings multiples have not been as low in more than two years.
IG Group
IG Group, the contracts for difference (CFD) and spread betting provider, thrives during times of volatile financial markets. Given that its traders tend to focus on short term trades, IG’s clients tend to perceive that greater opportunities are available when market are volatile. Already, trading revenue has grown by 4.9% in its 2014/5 financial year, and this year looks set to be even stronger.
Although the financial derivatives and gambling services that IG offers are highly commoditized, IG benefits from a relatively wide economic moat. In many markets, IG is the market leader by a large margin in retail FX, CFDs and spread betting. IG’s market share in CFD trading in the UK, which is estimated to be 34% in 2014, is more than four times larger than its nearest competitor.
The high profile collapse of a few of its competitors over recent years, including WorldSpreads and Alpari UK, have intensified concerns over the safety of client funds. And, this has benefited larger firms, as customers expect them to be financially more secure. In addition to financial stability, IG also benefits from product innovation, economies of scale and a strong brand identity.
Shares in IG trade at 17.0 times its expected 2015/6 earnings, and 15.6 times its 2016/7 earnings. In addition, its shares have an attractive dividend yield of 3.9%.
