I often find it interesting how a herd mentality attracts investors in their droves to certain types of shares. Although I’m not going to discuss behavioural investing in any detail, one doesn’t have to look far to find the most popular shares that are being purchased by investors.
Three of the most popular companies in demand over the last week were Glencore (LSE: GLEN), Royal Dutch Shell (LSE: RDSB) and Tesco (LSE: TSCO). They all appeared in the top five most purchased shares (according to the Top of the Stocks section from Fund Supermarket and broker Hargreaves Lansdown). And they all appeared in the top five in terms of the value of the transactions too.
A quick glimpse at the chart below could give us a clue as to why investors are flocking to these shares in huge numbers. You see, we humans like a bargain and as the chart depicts, all of these shares appear to be on ‘sale’. But just because the price is lower, does this mean that the shares are cheap?
Let’s take a closer look…..
New Year sales
Starting with Glencore, the heaviest faller, it doesn’t take long to work out the reason behind the huge fall in the share price. Indeed, here we have a company that has little control over the price of the commodities that it extracts from the ground and sells into the market. As we’ve seen with the oil price, most commodity prices (copper included) have been decreasing for some time now. When one couples this with investor concerns surrounding the debt pile here, it’s pretty easy to understand what’s behind the fall in the share price. Even with that fall over the last 12 months, the forecast price-to-earnings ratio is around 17 times earnings – hardly in bargain territory.
The strong survive
Next up is Royal Dutch Shell, this Anglo-Dutch oil and gas giant has managed to avoid the massive reduction in share price seen at some other oil and gas producers that are less diversified. But the shares have taken a tumble over the last 12 months as the bears seem to have really sunk their claws into the oil price of late.
And I think there’s scope for the price to decrease further but I believe that will, in the long run, be good for the company as it will price many producers out of the market. That would leave stronger companies such as Shell and the soon-to-be-acquired BG Group to prosper as demand begins to outstrip supply. And despite the cuts to earnings forecasts, the shares still trade on around 12 times forecast earnings and yield over 8%.
Finally, we have the one-time darling of the stock market Tesco. The shares have been on a steady downtrend for some time and rightly so in my view. Now I could well be saddled with leftover eggnog on my face if the supermarket giant reports a barnstorming Christmas trading period when it updates later this month – but then one good period does not a good investment make!
For me, it will take time for management to right the ship here, which could mean that there’s value to be unlocked for long-term patient investors. However, I also think there are too many challenges to be overcome to make this an attractive investment currently.