MONEY MATTERS MONDAY 29th OCTOBER 2018
Shopping for Share Market Bargains
The weakness and volatility in the share market have continued, causing investors’ concern. And that may continue for a while yet. However, weakness brings buying opportunities. Short term traders sell first and ask questions later, which often causes stocks to be oversold.
‘Growth stocks’ versus ‘Value stocks’
Which companies should investors consider buying? The shares that have fallen most are “growth” stocks, as distinct from “value” stocks. Growth stocks are those that the market believes are growing their businesses rapidly.
As a result, investors have already bid their prices up so they are expensive relative to their profits. In the US examples include the big technology stocks Facebook, Amazon, Netflix and Google. They have all fallen 10 to 20 per cent in October.
Australian growth stocks include CSL, Cochlear, Resmed, Wisetech, Appen, Altium and Xero. The first three have fallen 10 to 15 per cent while the others are down 20 to 30 per cent. This may make them good buying.
However, the future growth of the businesses isn’t certain and even at the reduced prices they are more expensive than market averages. CSL, Cochlear, Resmed and Appen cost 30 to 40 times last financial year’s profits while the others trade at even higher multiples.
Still they are a lot cheaper than they were, so if market confidence returns they are likely to rise strongly.
The big banks have taken a hammering all year from the Royal Commission. With a further setback this month they may be seriously oversold and represent good value buying. Telstra is another that has suffered from continuing bad press and may provide an opportunity.
These are all typical value stocks with slower business growth potential but long proven past performances. They have only fallen 5 to 10 per cent in October and are much more reasonably priced at only 10 to 12 times profits.
Like the banks, AMP has been pruned by the Royal Commission but its price rose in October to the 25th. Then the company gave a business update and announced it is getting out of life insurance after 130 years. Investors dumped the shares with the price down 25 per cent in two days.
It now costs only 7.5 times last year’s profit and may be good value. Nothing is certain in the share market but all these stocks are worth considering. The safest strategy is to buy a spread of shares so if one doesn’t perform, others should.
Diversification in your portfolio spreads risk
People who don’t wish to choose specific companies themselves can invest in share funds leaving the research and stock selection to professional managers. That also spreads the risk.
Disclosure: The writer owns some of the shares mentioned.
This is general advice and should not be treated as personal advice. Russell Tym is an authorised representative of MoneyLink Financial Planning Pty Ltd ASFL No: 247360.
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