As an investor, I’m always on the hunt for stocks to buy that can enhance my portfolio. However, I’m certainly on high alert when markets go into reverse. That’s because when share prices fall, there’s often buying opportunities.
Let’s explore.
Here’s what Buffett says
Legendary investor Warren Buffett often says he’s happy when share prices go down, because it provide him with the opportunity to buy more of his favourite stocks. Buffett once said that “net buyers” of stocks benefit when the stock market goes down.
But as a value investor, it can certainly be easier to find value stocks — those trading at a discount versus their book or intrinsic value — when share prices fall. To that end, Buffett once famously advised investors to be “fearful when others are greedy, and greedy when others are fearful”.
Finance
Stocks have fallen in most sectors in recent weeks, but the biggest losers have been financial stocks. This is one area I’m focusing on because I don’t believe the correction is warranted.
Stocks across the sector fell following the Silicon Valley Bank fiasco, which raised concerns about the health of other banks‘ bond holdings. However, as far as I’m concerned, these concerns are largely overplayed.
European banks like Lloyds and Barclays have diverse bond holdings, impressive liquidity coverage, and sticky household deposits accounting for 30% of all liabilities. These are very different banks to the US tech financier that had to sell bonds at a loss as interest rates rose.
The biggest challenge for banks is debt turning bad with interest rate rising so quickly. But, ever the optimist, I think we’re close to the terminal rate.
But it wasn’t just banks that fell. Companies like Legal & General and Hargreaves Lansdown suffered, perhaps unfairly.
Housing
Housing stocks are among those feeling the pain too. Persimmon is down 13% over a month (down 45% over 12 months), and several housebuilders fell further after the rate rise this week — despite a positive forecast on inflation.
One stock that largely bucked the trend is Vistry Group. The stock is down around 6% over a month (down 25% over a year), but there’s been some positive news. The firm noted a 21% rise in adjusted pre-tax profit to £418.4m for the year to 31 December and said buyer confidence was improving.
I think the worst is behind housebuilders.
So, what am I doing?
I’m focusing on the hardest hit part of the market, banks. Barclays is down over 20% in one month (17% in a year) and I really don’t think it’s warranted. The stock is now trading with a price-to-earnings of just 4.5. As such, I’m topping up on stocks like Lloyds and Barclays.
I also think it’s time to reconsider the housing market. And Vistry is a good option. Interest rates could well fall from here, and that’s good for private sales. Moreover, the housebuilder has an affordable homes business that should provide some degree of visibility on future revenues — we could even see growth here with the government missing its own affordable homes target.
