The FTSE 100 index came crashing down last week, falling a massive 11%. Around the world, stocks sold off in a manner that we’ve not seen since the global financial crisis in 2008. Investors are fleeing in their droves, in a panicked response to the global coronavirus outbreak.
Clearly, these are worrying times. Nobody knows how long the outbreak is going to last, and what damage it’s going to do. It’s this uncertainty that’s being played out in the global financial markets, so dramatically.
Market overreaction
But my view is that the markets – as they so often do – have overreacted to this uncertainty. Over the last 100 years, international businesses, economies, and stocks, have repeatedly demonstrated that they can, in time, recover from any number of setbacks. Stock markets recovered from the Second World War, the 2001 terrorist attacks, and the SARS outbreak. Stock markets have recovered from every single event of the last century.
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My own view is that the outbreak will negatively affect earnings and business performance in 2020, but that by next year, it will be business as usual. As such, I believe that the market sell-off has presented mass buying opportunities, the likes of which I’ve not seen in the last 10 years.
Airline stocks have been among the worst affected. Shares in IAG – the owner of British Airways – have fallen by around 26% in the last two weeks. The group is now valued at just three times 2018’s earnings. Its valuation effectively implies that IAG will be unprofitable for multiple years. Reaching that conclusion, on what we have seen from the coronavirus so far, is completely irrational, in my opinion.
The discounted cash flow model — used by analysts to value shares — shows that when interest rates are low (as they are now), the value of a company is less dependent on short-term profits. As long as profitability is at some point restored, the valuation should remain intact.
Flying low
Like IAG, Wizz Air’s shares have also fallen by more than 20%, bringing its valuation to around 11 times this year’s expected earnings. Considering its recent track record of profitable growth, I think this represents a real bargain.
Costain, Redrow, Direct Line and Aviva, have also seen their share prices fall more than 10% over the last two weeks. With P/E (price to earnings) ratios of under 10, all these stocks look too cheap to me, especially considering dividend yields of 9%, 4%, 6% and 8%, respectively.
Sainsbury’s shares have sunk by 5%, less than most, but still enough to warrant attention. The supermarket is now valued at a 48% discount to its net assets, and has a hefty 5% dividend. As far as I’m concerned, it should be relatively immune to the affects of the outbreak. People will still need to shop for essentials like food and drink, after all.
The best opportunities
The stock market crash has affected the shares of virtually every sector of the market. I believe that the best opportunities lie in both the sectors that are most affected, where share prices have collapsed, and also in those sectors that will not be badly affected, but that have been caught up in the general sell-off.
As Warren Buffett says: “Be fearful when others are greedy, and greedy when others are fearful’’.
