Investors worried as market turbulence has stretched into February would do well to recall Warren Buffett’s old aphorism to “be greedy when others are fearful”. This contrarian streak has served the Oracle of Omaha well over the decades and has resulted in some of his best purchases. For investors wishing to channel their inner Buffett and pick up great shares at bargain prices, will Royal Dutch Shell (LSE: RDSB), Prudential (LSE: PRU), or Royal Bank of Scotland Group (LSE: RBS) fit the bill?
Folly or far-sighted?
Royal Dutch Shell shares have sold-off in droves over the past year, not only due to plummeting crude prices, but also the hefty £35bn acquisition of BG Group set to finalise next week. Investors are concerned that the deal, which was hammered out when crude prices were twice what they are now, will prove an expensive folly at a time when Shell needs to retain cash and buckle in for an extended period of low prices. However, I believe this attitude is missing the wood for the trees. BG brings to the table incredibly low-cost offshore assets in Brazil, an area in which Shell is a world leader, and enough liquefied natural gas assets to make the combined group the world’s largest provider.
Furthermore, the deal begins to pay for itself with crude prices in the mid-$60s, which isn’t a hard-to-believe level to reach over the next two-to-three years. Investors should also like the short-term effects of the deal as BG’s low-cost assets will be materially beneficial to Shell’s dividend, which is currently yielding a fantastic 8.7%. With shares trading at 11 times forward earnings, a healthy balance sheet and good long-term potential, I believe investors could do well by taking a closer look at Shell.
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Bear market bargain
Meanwhile, insurer Prudential has also been knocked-back due to forces beyond its control: shaky markets across the world harming the asset management business, and a slowdown in China harming the insurance side. While wholly-owned asset managers have seen net outflows, this has been a problem across the industry in reaction to volatile markets and low interest rates affecting fixed income funds. Furthermore, total assets under management have remained level due to investment gains. On the second point, the facts on the ground don’t bear this hypothesis out. Sales in the Asia Pacific region grew 31% and new business profits were up 26% year-on-year. Shares are currently trading at 10 times forward earnings and offer a 2.9% dividend alongside great growth potential, leading me to believe Prudential could be a bear market bargain.
Risky, but rewarding
While Prudential continues to hum along nicely, RBS is still grappling with many of the issues it has faced since the Financial Crisis. Risky assets have been offloaded and capital buffers have been built up enough to allow a return to small dividend payments a year ahead of schedule. But results later this month will see 2015 become the eighth consecutive year of losses due to several billion pounds of regulatory fines. Despite this scary headline, the underlying business appears to be very sound. The go-forward retail bank boasts a very solid return on equity of 13%, and many of the largest non-core assets have been sold off. At just a 0.3 price/book ratio, the shares have significant upward potential and I believe RBS could be a risky but rewarding option.
