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.
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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.
