Forget the next market crash. Opportunities abound today.
I'm always on the hunt for good value shares to highlight to Motley Fool readers.
Today was no different. I started by looking for companies valued at £20m+ that were down 50% or more from their 52-week highs.
The list was depressingly short. There was some good old fashioned dross in there, including dogs like Punch Taverns (LSE: PUB), Wolseley (LSE: WOS) and Helphire Group (LSE: HHR), but nothing that instantly jumped out at me and said "Help…the market has forgotten all about me."
I relaxed my criteria, now looking for companies that were 'only' 25% or more off their 52-week highs. Again, the list was short. Surprisingly short.
This time, companies like Yell (LSE: YELL), Ladbrokes (LSE: LAD) and DSG International (LSE: DSGI) populated the list. Such companies may be selling at 25% off, but they don't stand out to me as obvious bargains.
All the obvious bargains are gone. Long gone. Yes, I might be stating the obvious, seeing as the FTSE 100 is up 45% from its March lows, but when I looked, I really expected to see a few more obvious investment opportunities.
All Was Good
So then I really put the thinking cap on, coming up with what I'm proudly calling "The Great Investing Light Bulb Moment Of My Lifetime".
Ok, I admit I'm prone to exaggeration. But read on...
Think back a couple of years, when all was good in the world of high finance and high stock market investing.
The economy was going along just fine. It was going along so well that most investors, me included, didn't spend more than about 30 seconds per annum thinking about it.
Sure, many of us thought house prices were over-valued, but so what? As long as we didn't jump on the buy-to-let bandwagon, there was little we could lose. At the same time, myself and many others ignorantly and naively hung onto banking shares like HBOS (Rest In Hell) and Barclays (LSE: BARC).
The Long And Winding Road
Obviously, over-valued house prices and over-indebtedness in general, did effect us all, in a quite catastrophic way.
Our share portfolios were hammered. Our pension values were hammered. Millions of people have lost their jobs. Thousands of people have lost their houses. The economic road ahead will be long and bumpy.
But I digress. Back in "the good old days", investors were comfortable paying a P/E of say 15 or 16 for a decent business with decent growth prospects. Companies like BAE Systems (LSE: BA), WPP Group (LSE: WPP) or Vodafone (LSE: VOD), for example.
Don't Dream It's Over
Today, many of us, me included, wouldn't dream of paying such high multiples. Obviously the economy now is much different to two years ago, and that should have some adverse effect on valuations. But, on the flip side and to compensate for the state of the economy, interest rates are much, much lower today.
Take Vodafone for example. In 2005, 2006 and 2007 it traded on an average P/E of around 15. Today, its forward P/E is just 9, or 40% less than it traded on back on the go-go years.
Vodafone is bigger now, so won't grow as quickly, so some discount is justified. But 40%? Probably not. And then there's the dividend, yielding over 6%. In an environment of ultra low interest rates, surely that is an ultra-attractive dividend yield… unless you think some new players are going to start building mobile phone towers across the country and the globe.
My Light Bulb Moment
The mega-bargains may be gone. That's ok, because in hindsight, March 2009 was a unique investing time. Forget it. Move on.
It was my light bulb moment. Forget the past. Forget buying companies on P/E's of 5. In the low interest rate environment of today, paying a P/E of 10, 12 or even 14 (ooh la la) is perfectly fine.
Opportunities today are staring us in the face -- opportunities to buy solid companies trading at decent prices, with nice dividend yields thrown in for good measure. You may not shoot the light bulbs out with your returns, but they still should do better than leaving your money sitting in the bank.
More on the economy and the markets:
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> Bruce Jackson doesn't have an interest in any of the companies mentioned in this article.
