There are times when long-term investors should thank periods of heightened market volatility as it tends to throw up opportunities to buy into quality businesses at discounted prices.
If you add to the mixture strong businesses that have hit a bump in the road, or when the market as a whole is pessimistic on the sector itself, then investors can often find themselves with multiple opportunities to buy (and indeed top up positions in their favourite shares).
Today I’m taking a look at three companies currently out of favour with the market. Let’s take a look…
Out of fashion?
Shares in Burberry (LSE: BRBY) — the UK-based manufacturer, wholesaler and retailer of luxury goods sporting the famous ‘Burberry check’ — took a bath when management announced the first-half trading update last Thursday. Indeed, the shares haven’t traded at these prices since back in May 2013.
Reading through the release, I noted both positives and the areas which seem to have caused investors to take flight. I believe that it was the issue of the challenging environment in China and management’s belief that the interim results would be broadly in line with the average of analyst expectations, being profit before tax of £485 million.
To be fair, analysts had already been reducing their 2016 EPS expectations from almost 85p per share six months ago to just over 75p currently.
It looks to me that the market is currently worried about the potential of a sustained slowdown in China, and will be looking towards the post-Christmas trading update for signs of a recovery. The update, scheduled for 11 January 2016, will likely be a catalyst for a re-rating, though the direction of said re-rating will depend on how sales have held up over the festive period.
Ready for take-off?
Another blue-chip to underperform the FTSE 100 over the last three months is Rolls Royce (LSE: RR), the UK-based designer, developer, manufacturer and service provider for power systems used in air, on land and at sea.
The bad news has been out for some time for this troubled engineering giant. Analysts have not wasted any time taking a hatchet to their forecast, either. Indeed, 2015 EPS forecasts are over 20% lower than the consensus estimates from this time last year according to figures from Stockopedia.
However, with new CEO Warren East at the helm, and the arrival of US activist hedge fund Value Act, which now owns 100 million shares in the company, I can see the potential for the company to set off onto the road to recovery, and while nothing moves in a straight line, investors either opening or adding to a long-term position could be rewarded over time.
The next update will be on 12 November 2015 for its third quarter Interim Management Statement for 2015.
Failing to deliver?
I remember not so long ago, the now ex-MP Vince Cable was under pressure for selling off Royal Mail (LSE: RMG) on the cheap. Using my 20:20 hindsight, his critics were probably correct as the shares nearly doubled from their 330p IPO price in the subsequent six months.
At the time I didn’t complain too much, but I did sell a little too early. However, recently investors may have been afforded another chance. The shares briefly fell below 400p last October and December, and they currently seem to be in another downtrend, potentially giving investors another opportunity.
The UK government has now fully exited the company, selling its remaining 14% stake at around 455p, and gifting the final 1% to eligible employees of the group.
I suspect that this has created quite an overhang in the shares, which currently trade below the price that the government exited. I’d expect that overhang to be removed over the coming weeks as the market looks towards the interim results in November — this could be the opportunity that investors who missed the original IPO have been waiting for.
Wrapping it all up
As the below chart depicts, all the shares have underperformed a declining FTSE 100, possibly creating an opportunity.
And while there is no doubt that shares can always get cheaper, I’d argue that investors with a long-term time horizon should be richly rewarded over time.
