Is the market losing its marbles? Maybe you can profit.
Warren Buffett famously urged us to be greedy when others are fearful. The idea is that emotions and the herd mentality cause assets to be mispriced when investors panic.
Like most stock market wisdom, it's easier understood than followed.
If every investor knows to "buy when there's blood on the streets" (even if nobody knows who first coined that proverb) then the opportunity to profit from panic should be in the price, too.
In reality, a crisis is only definitely revealed as a panic in retrospect. For instance, in 2004 the oil giant Royal Dutch Shell (LSE: RDSB) was hit by a reserves scandal; the company had basically chalked up several billion barrels of oil as ‘proven' when, technically speaking, that wasn't true. Shell said the oil was still in the ground though, and contrarian investors who took the same view made a bundle when Shell bounced back.
On the other hand, anyone who bet in 2007 that Northern Rock's funding difficulties would be temporary lost the lot. Sometimes a drama really is a crisis.
Five crisis plays
Investors who want to profit from panic are spoiled for choice right now.
The FTSE 100 has fallen nearly 8% in a little over two weeks, and much of the decline can be chalked up to unquantifiable fears, as opposed to poor company results or a fall in reported earnings.
From Europe's sovereign debt crisis to taxes in Australia -- via Goldman Sach's mauling in the US, the oil slick in the Gulf of Mexico and the ash cloud re-emanating from Iceland -- these uncertainties could be opportunities for bargain hunters.
Alternatively, they may prove well-founded fears. That's for you to decide!
If you want to have a go, here are five shares being pulled through the mill.
BP
BP's (LSE: BP) shares have fallen by as much as 15% since the Transocean rig it licensed to drill an oil field in the Gulf of Mexico exploded on 20 April with the loss of 11 lives. The shares have slumped as the resultant oil slick spread towards the American coast and the extent of BP's liability became clear -- not to mention President Obama wading into the ring.
Is the drop overdone? Estimates at the cost of the cleanup range widely, from Citigroup's $1 billion estimate to investment firm Bernstein's $7 billion.
Compensation to the fishing and tourism industry could add $6 billion more, according to Bernstein.
Let's say the current worse case scenario is $13 billion -- around £8.5 billion. That's far less than the £17 billion or so that's been wiped off BP's valuation since the explosion.
Of course there's a risk that BP's reputation will be permanently damaged.
But equally, rivals like Shell could also be hit by stricter controls on oil extraction in the US, and its shares have barely budged. That may imply the fall in BP's share price is overdone.
Rio Tinto
Rio Tinto's (LSE: RIO) shares were just shy of £36 on Friday. They closed last night at £31.59. In between, the Australian government confirmed it plans to bring in a 40% windfall tax on mining within its borders.
Assuming the tax is enshrined into law, it will come into force in 2012. UBS has estimated it will cut Rio Tinto's earnings by 21% in 2013, which suggests the fall in Rio's share price could actually be much worse.
Presumably investors expect the law to be tweaked, or that Rio will find a way to mitigate its effects. Indeed, the mining giant's shares have rallied more than 2% today to £32.48.
Aviva
Shares in the insurance giant Aviva (LSE: AV) have been tempting value investors for months, on the back of a lowly P/E rating and a high yield. The Fool's own value guru Stephen Bland recently increased his stake in Aviva, judging the P/E too low and the yield too juicy to resist.
Since then the P/E has got lower -- to 5 -- and the forecast yield is an even juicier 7.5%.
There's no consensus as to what's driving Aviva's share price down, but I think it has to be related to Europe's sovereign debt crisis. With the Greek situation still not resolved, government bond yields are rising in Spain and Portugal, and Aviva is known to have exposure to bonds from all these regions.
To judge whether that exposure is significant, much more research would be required. If you think fears of Eurozone contagion are overdone though, you might buy the shares now to back your hunch.
Barclays
Barclays' (LSE: BARC) share price is probably also being driven lower by fears of the repercussions of a Eurozone debt crisis. But I suspect Goldman Sachs' tribulations in the US are weighing on the UK bank, too.
Whatever the result of the SEC's probe into fraud at Goldman Sachs, tighter regulation of investment banks now seems inevitable -- and those with significant proprietary trading operations such as Barclays could be hardest hit.
British Airways
To cap it all, the ash cloud is back. Airports in Ireland and Scotland have been closed as fresh plumes from the Icelandic volcano have drifted into domestic airspace.
Shares in British Airways (LSE: BAY) dropped as much as 4% this morning on fears that the cloud will hit London and cripple its core operations. The company's share price is still in the doldrums from the first wave of groundings.
Will the ash cloud persist? Are the authorities better placed to judge its impact on aviation this time? Place your bets!
The panic portfolio
So: five panics and five blue chips offering a way to play them. The chances are one or two will prove red herrings, but any one of them could prove critically important for the company concerned.
To spread the risk, we could buy a ‘panic portfolio' of all five companies:
| Company | Price |
|---|
| BP | 562p |
| Rio Tinto | 3,248p |
| Aviva | 327p |
| Barclays | 318p |
| British Airways | 209p |
It will be interesting to see how this portfolio performs against the wider FTSE 100 index -- which stands at 5,400 at time of writing -- over the next 12 months.
More from Owain Bennallack:
> If you're in the market for buying shares, consider opening an online broker account with The Motley Fool's Share Dealing Service. You can buy and sell shares in real time for a flat rate of just £10. Click here to open an account for free today.
> Owain Bennallack owns shares in Shell.
