The FTSE 100 has been dipping perilously in the past few weeks, giving up 722 points (10.5%) from its recent high of 6,905 on 4 September to Monday’s close of 6,183 — and if it can lose that much in three months it could certainly drop to 6,000 or lower by the end of December.
Often such runs can be put down to individual sectors, and the big safe companies are there to offer some support and prevent a meltdown. But the crucial driver right now is oil. Brent crude crashed through the $60 per barrel level this week to reach its lowest since 2009, and as I write today it’s trading at a fraction under $59!
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Sector being crushed
We’ve seen smaller oil explorers and producers regularly scraping 52-week lows of late, and even BP shares are plumbing new depths. BP has its own problems, of course, which will account for some of the uncertainty.
But FTSE 100 rival Royal Dutch Shell (LSE: RDSB) must be the safest and most solid company in the sector, with a market capitalization of around £130bn and easily able to outlast an oil squeeze — yet its shares are being hammered along with the rest.
In fact, Shell shares slumped by 17% between 21 November and close on 15 December. The price is back up to 2,105p now, but that’s still a 12% fall. And with a company as big as Shell, that has a direct impact on the whole market — it’s the biggest in the FTSE 100, and accounted for 8% of the value of the index as of 14 December.
What should investors do?
Magic numbers like 6,000 actually don’t mean much at all, as they’re just the products of the various fudge factors that are used to calculate an arbitrary value for the FTSE.
But these arbitrary levels do have a disproportionate psychological effect on a lot of punters, and that gives rational Foolish investors an advantage. We should be looking for bargains right now — and that’s what Shell is looking like to me.
The latest oil price falls won’t have made it into the current consensus just yet, but a forward P/E of only 9 for the end of 2014 followed by around 10 for 2015 can afford to be adjusted upwards a bit while still looking cheap.
The share price fall has left Shell’s predicted dividends yielding a hefty 5.8% this year and 6% next, and we’re looking at cover by earnings of almost two times this year. Again, Shell could afford to cut its cash payments if it needs to, while still providing a very good yield for such a low P/E.
So, ignore 6,000, and look at fundamental long-term valuations, that’s what I say.