It has been a tumultuous few days in stock markets around the globe. Some leading shares have seen sizeable drops. The flagship FTSE 100 index has lost 5% in a matter of days, although it is still 5% higher than it was both one year and five years ago.
So does that fall give me a buying opportunity?
Laser focus on quality
The answer is both yes and no. Yes – I definitely do see some buying opportunities for my portfolio. But no, I do not plan simply to pile into FTSE 100 shares as a group. Instead, I want to focus on just a few that I think offer outstanding quality but at an attractive price.
100 different stories
An index like the FTSE 100 is exactly what its name suggests, a collection of 100 shares. Indices such as the FTSE 250 and FTSE 350 contain an even wider selection of stocks.
So just because a FTSE index is falling does not mean that each of the individual shares inside it is cheap. Whether a share is cheap is a judgment based on its price today and how that compares to what I think it ought to be worth based on a company’s long-term earning power. That is not the same thing as comparing it to the previous share price.
Take FTSE 100 member Barclays as an example. It has fallen 12% over the past year. Does that mean it is cheap, given its strong brand and proven profitability? Not necessarily. After all, the prospects of Barclays now look different to a year ago. Post-tax earnings last year fell by 15%. A tight economy could make it harder for banks to make profits in coming years.
Strong business prospects
However, if I see the shares of what I think are outstanding FTSE companies on sale at an attractive price, I will typically consider adding them to my portfolio.
At the moment, I think a number of shares meet such a definition.
Take JD Sports for instance. I already own a stake in this FTSE 100 retailer. But at the moment its market capitalisation is around £9bn. That looks cheap to me for a company that expects to achieve headline profit before tax and exceptional items of over £1bn this year and has plans to open hundreds of new stores annually. One risk I see is that the capital expenditure of such expansion could hurt profit margins.
Another example is conglomerate DCC. I started buying its shares this year after they fell in price (they are down 24% in the past year).
With a price-to-earnings ratio of 13 and dividend yield of 4.1%, I see the company as good value. It is highly cash generative and has a large installed customer base I think could help it keep doing well in future. Debt is a risk though. Funding acquisitions has added to DCC’s indebtedness, something that could eat into profitability.
I’m buying FTSE shares
Companies like JD Sports and DCC are not attractive to me just because their shares look cheap. Rather, they are attractive because I think the firms have bright financial prospects for the years ahead. The fact their shares are currently cheap has given me a buying opportunity. And I have seized it!
