Or will they? We hunt for value among the biggest fallers so far this year.
American humorist and literary genius Mark Twain had a witty quote for almost every situation. One of my favourites (from Pudd'nhead Wilson, 1894) is: "October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February."
As a result, the below-average monthly returns produced in some Octobers are described as the 'Mark Twain effect'.
The January effect
Another peculiarity noticed by stock-market historians is the 'January effect', summarised as, "So goes January, so goes the year." Thus, market falls in January can be a forward indicator of a negative year for the market. Conversely, rising prices in January hint at positive returns for the year.
Of course, this is merely an observation based on history, rather than a rigid rule. What's more, while share prices tend to rise both in January and each year (but not always), the positive correlation between these two trends is lower than one. Therefore, these movements are not precisely in unison.
Being contrary
As I write, the FTSE 100 index of elite listed companies stands at 5,775, up 203 points (3.6%) on 2011's closing level of 5,572. Thus, if the January effect holds true this year, then shareholders can expect positive returns from the London market in 2012.
However, as a contrarian and value investor, rather than a trader, I much prefer bargain-hunting to trend-following. Hence, today I will poke around among the main market's biggest fallers so far this year. My aim is to find shares that have fallen steeply, but have potential to bounce back in the coming months.
Ten fallen angels
By sifting through January's FTSE 350 wreckage, I hope to identify shares whose recent falls have taken them firmly into value territory.
To this end, here are the 10 biggest slumpers in 2012 to date, chosen from the members of the blue-chip FTSE 100 and mid-cap FTSE 250 indices:
| Company | Share price (p) | YTD fall (%) | P/E* | Dividend yield (%) | Dividend cover |
|---|
| Essar Energy (LSE: ESSR) | 135 | -20.7 | 12.5 | 0.0 | N/A |
| Tesco (LSE: TSCO) | 322 | -20.2 | 9.0 | 4.5 | 2.5 |
| Telecom Plus (LSE: TEP) | 665 | -15.4 | 21.7 | 3.4 | 1.4 |
| PZ Cussons (LSE: PZC) | 301 | -13.9 | 18.7 | 2.2 | 2.4 |
| Wm Morrison (LSE: MRW) | 293 | -10.0 | 12.7 | 3.3 | 2.4 |
| Go-Ahead Group (LSE: GOG) | 1,257 | -9.1 | 9.2 | 6.5 | 1.7 |
| Carnival (LSE: CCL) | 1,925 | -9.0 | 12.3 | 3.4 | 2.4 |
| TalkTalk Telecom Group (LSE: TALK) | 123 | -8.7 | 9.2 | 4.5 | 2.4 |
| FirstGroup (LSE: FGP) | 310 | -8.0 | 7.4 | 7.2 | 1.9 |
| Interserve (LSE: IRV) | 299 | -7.1 | 7.0 | 6.1 | 2.3 |
Sources: Bloomberg, Digital Look | * P/E = price-to-earnings ratio
As you can see, these share prices have fallen between 7% and 21% since 31 December 2011.
The biggest faller is Indian energy group Essar Energy, followed by supermarket giant Tesco and then Telecom Plus, owner of The Utility Warehouse. Other double-digit percentage fallers include PZ Cussons, maker of personal healthcare products including Imperial Leather soap, and supermarket chain Morrisons.
Two bargains, two rejects
Recently, I have aired my views on three of these 10 big fallers.
On 18 January, I suggested that Essar had entered bargain territory at 141p, having plunged 70% since listing at 420p a share in May 2010. Two days earlier, I turned my nose up at Carnival shares at 1,891p, following the capsizing of the Costa Concordia cruise liner. In December, I indicated that shares in PZ Cussons would need to fall closer to £2 before entering my bargain basement.
Also, my Foolish friend Alan Oscroft revealed on 19 January that renowned value investor Warren Buffett had increased his stake in Tesco to 5.1%. This followed a 20% slump in its share price after reporting disappointing sales growth.
For me, both Essar and Tesco remain in value territory, while Carnival and PZ Cussons are too rich for my blood.
Cheap and cheerful
Old-school value investors look for stocks displaying low P/E (and, therefore high earnings yields) and high, well-covered dividend yields. The good news is that the above table includes several candidates worthy of the attention of bargain-hunters and income-seekers.
The five shares with the lowest P/Es from the above fallers are Interserve (7), FirstGroup (7.4), Tesco (9), and Go-Ahead and TalkTalk (both 9.2). With these companies generating earnings yields of between 11% and 14%, they should certainly be added to value watch lists, before screening with other value indicators.
The five highest-yielding shares from the 10 are FirstGroup (7.2%, covered 1.9 times), Go-Ahead Group (6.5%, covered 1.7 times), Interserve (6.1%, covered 2.3 times), Tesco (4.5%, covered 2.5 times) and TalkTalk (4.5%, covered 2.4 times). Essar is the only one of the 10 not to pay a dividend.
Each of these five shares has an above-average yield versus the wider market, ranging from 4.5% to a chunky 7.2%. What's more, dividend cover ranges from 1.7 to 2.5 times, making these payouts well covered and, therefore, offering scope for future increases.
Seven value candidates
In summary, I consider seven of these shares as worthy of further investigation, but three (Carnival, PZ Cussons and Telecom Plus) look too pricey for my tastes. As always, please do your own research before buying!
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More from Cliff D'Arcy:
> The Motley Fool owns shares in Tesco.
