A Fool goes in search of the latest bargains.
"Never catch a falling knife", people say, because a share that has fallen may keep on falling. I would beg to differ; if you have the skill to buy in near the bottom -- and it is a skill -- then you might just bag yourself an absolute bargain.
This is an investing technique I have used before with some success, so I thought I'd have a search for more bargains. Here is what I found: these are three falling knives which I think are worth a closer look.
Resolution
A casual skim through the highest yielding shares in the FTSE 100 brought up a company I knew very little about: Resolution Limited (LSE: RSL). This is an insurance company with a rather unusual history.
The firm was started in 2008 with a strategy of buying up unloved life insurance assets and wringing out excess costs from these companies. The business bought Friends Provident in 2009, and a year later it acquired Axa Sun Life Holdings. Then in 2011 BUPA Health Assurance was bought.
This company has particular appeal for high-yield investors, as at the current price of 213p it is on a forecast yield of 9.8% -- very juicy, and one of the highest yields in the Footsie.
Why is the yield so high? Well, the company had a rough 2011, making a loss of 4.3p a share, having made a profit of 80p a share in 2010. The loss was due to a fall in value of its long-term investments (operating profit was actually up). Since these results came out, the shares have been tumbling.
But, importantly, the company was still able to raise its dividend by 10%, as it has an impressive capital surplus of £2.1 billion.
What's more, things are looking much better for 2012, with the firm forecast to return to profit, and it is currently on a forecast P/E ratio of 9.6, which falls to 7.6 for 2013. Resolution is definitely in bargain territory now.
Has the knife hit bottom yet? Well, having seen what has happened to other companies in the out-of-favour insurance sector such as Aviva (LSE: AV) and Royal & Sun Alliance (LSE: RSA), I wouldn't be surprised to see Resolution fall in price for a while yet. So, for me, this is one to keep on your watch list and monitor patiently.
First Group
If there are two themes which are coming through from this article, they are high-yield investing, and the importance of patience.
I tipped First Group (LSE: FGP) as a high-yield bargain back in February, but I was too quick off the mark. A recent poor set of results which indicated that the company's UK bus operations were suffering as Britain's economy remains stuck in the doldrums caused the shares to be trashed.
A year ago, First Group's share price stood at 350p. After the profit warning the shares slumped, and they now stand at 210p. This puts the company on a forward P/E ratio of 5, with a prospective dividend yield of 11%.
Will the dividend be cut? Well, so far the board is holding firm, reiterating its commitment to raising the dividend by 7% a year despite the profit warning. Even if the dividend is just frozen, it is reason enough to buy the share.
Yes, it is true that we now expect First Group's profits to be eroded for the next couple of years, as UK bus margins are squeezed, but even if you factor in this bad news, in my view the shares still look too cheap. After all, the company's US business, and the train operation, are still doing well.
I feel the shares may have now bottomed, and any piece of good news, such as a train franchise win, could give the share price a boost.
AstraZeneca
Last year I argued that, of the two pharma giants AstraZeneca (LSE: AZN) and GlaxoSmithKline (LSE: GSK), I would go for GSK, as I feared AstraZeneca was heading for a fall because of the steepness of its patent cliff.
I think AstraZeneca is now in the middle of tumbling down that patent cliff, and it is suffering just as I feared. The expiry of patents for blockbusters such as Seroquel and Symbicort, and a weak drugs pipeline point to difficulties ahead for AstraZeneca.
Thus AstraZeneca is a cheap share that has been getting cheaper. A year ago the company's shares touched 3,200p. They have now fallen to 2,700p.
I see this as a knife falling through treacle. As patents expire one after the other, earnings will edge downwards, and this will put gradual but steady downward pressure on the share price.
As there are more patent expiries to come, the share price could yet fall further. So this is another one for the patient. Keep this share on your watch list, and bide your time. Time your move well and you will be getting a slice of a global pharma giant at a rock-bottom price.
What now?
Of course, nothing is ever guaranteed with shares and these falling knives may indeed cause some portfolio bloodshed in time. But as I say, I'm confident the three names are worth a closer look and a lot of the bad news is already priced in. Indeed, some of the market's best investments are those shares that have fallen heavily -- only to rebound strongly when the dark clouds disappear.
Finally, let me finish by adding that more large-cap ideas can be found within "Top Sectors For 2012" -- a Motley Fool study of three favourable sectors that could offer potential opportunities for long-term investors. The report is free.
Further investment opportunities:
> Prabhat owns shares in Aviva, Royal & Sun Alliance and GlaxoSmithKline.
