I read a comment in the Daily Telegraph this morning that concluded (about Pearson's (LSE: PSON) trading statement yesterday) that it might make sense to buy the shares 'in anticipation of the American revival'. Pearson is a member of the Fool's Rule Shaker portfolio, which I manage, so I hope they're right. Anyway, combined with the recent, hesitant, recovery in the stock market and the occasional 'cautiously optimistic' comment from companies, it got me thinking about buying shares for a recovery.
The shares that would be best placed to benefit from a recovery are, broadly speaking, the ones that got mullered in the downturn that we're supposed to be recovering from. There's an important rider to this, though. Although you'd want shares that look decidedly sick, you need them to have the resilience to stick it out until the recovery arrives. A great many technology, telecoms and media stocks, with their stocks of cash running low, will fall at this first hurdle. On the other hand, companies such as Pearson, as the Torygraph indicated, have assets of sufficient quality to see them through.
The best indication of quality is to look for companies that have managed to keep their financial performance relatively intact. After it's warning yesterday, Pearson is not the best example of this. A better one would be ARM Holdings (LSE: ARM) which continues to show healthy growth, albeit lower than had been expected. The trouble with ARM is that you still have to pay for that financial performance. While others in its sector have gone up in smoke, ARM sports a share price that's down 'only' 64% from its £10 peak.
The ideal recovery share would be one that's seen it's share price trashed as it's been tarred with the same brush as the rest of its sector, but which has continued to produce decent results and can be expected to carry on doing so. In fact, that would be an ideal share for any occasion. Unfortunately they don't exist. Or at least they're very hard to find.
The next thing to consider with recovery shares is when to buy them. The trouble here is that if we wait to see signs of the recovery, then we'll most likely have missed the boat. It almost feels like the beginning of a 100m sprint. If you go too soon, then you'll be hauled back for a false start (as has happened several times over the last couple of years), while if you go too late, then you can forget the medals. You need to time it just right. Sadly that's not possible either, except by very good luck.
People will always suggest different methods for timing your entry into a market or share, but the evidence is stacked heavily against all of them. Some will tell you to look for a certain PE that's likely to indicate the low point for valuations. The trouble is that this just relates to what has happened in the past. It takes no account of what's happening now or, indeed, whether or not the anticipated recovery is about to arrive.
Others will tell you to look a the charts to see signals that buyers are returning to the market, but you won't get far just by following other people around. In any case, how far do share prices have to go before they suggest a purchase? Plenty of 'tech' shares have more than doubled from their lows already, except they've done that before and then halved again. Should they treble or quadruple? No doubt people will say that it depends how far and how fast they've fallen, but how far are they likely to climb before they sink again and provide the signal for getting off? These various points in time are mere figments of the imagination. They only exist because of investors following the momentum and they only serve a purpose for those same investors.
So we find ourselves back at a point where the best shares to buy for a recovery are, well, the best shares to buy and the best time to buy them is, well, your guess is as good as mine or anyone else's. To me, this takes us back to investing in decent companies at sensible prices (that is, at a discount to their intrinsic value) and not worrying too much about where the economic cycle is taking you in the short term.
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