Good investors should always be on the lookout for stocks to buy. And sometimes, opportunity comes when the market is down, and simply, when bad things happen.
As most readers will know, the conflict in the Gulf has weighed on the stock market. Some stocks are down more than others. And that depends on their exposure.
Personally, my strategy is to buy stocks when the market is taking a hammering. It might sound painful, but it’s how some of the best investors operate.
However, I appreciate some investors may wish for tensions to die down before investing further.
Geography matters
Around 20% of the world’s oil passes through the Straits of Hormuz every single day. When that shipping lane is disrupted or threatened, oil prices stay elevated — and elevated oil doesn’t just mean expensive petrol at the forecourt. It ripples through the entire economy.
Jet fuel, which is essentially refined crude oil, is one of the largest single cost lines for any airline or package holiday operator (as much as 35% of operating costs). And food inflation is partly an oil story too, because energy costs sit inside fertilisers, packaging, cold storage, and logistics.
This is why both Jet2 (LSE:JET2) and Marks & Spencer (LSE:MKS) have been hit by the conflict despite having almost no operational exposure there.
Jet2: priced for disaster
Jet2’s share price has fallen 42% from its 52-week high to 1,121p.
It now trades at just 6.3 times forward earnings (P/E). That alone looks good value relative to peers, but the company also boasts an incredibly strong balance sheet. Remember, P/E ratios are only really relevant when they’re contextual.
Jet2’s balance sheet is fortress-like, and that makes it well positioned to navigate uncertainty like this. It’s a little confusing because of the presentation in the earnings documents, but the company appears to have a net cash position of £800. That’s substantial for a company generating about £400m in net earnings per year.
Of course, a prolonged conflict here is a risk. Jet2 is phenomenally well hedged — over 75% of jet fuel purchased for the year — but the longer the conflict goes on, the greater the exposure becomes to sky-high spot prices.
It’s worth considering. Definitely my favourite in the sector.
Marks & Spencer: just needs a clean break
M&S has had its own difficult year — remember the ransomware attack.
Right now, however, UK grocery inflation is still running at 4.3%, squeezing food margins and dampening consumer sentiment. The irony is that M&S’s underlying business is performing well — revenues rose 23% in its last half-year to £7.94bn, and analysts expect earnings per share to grow 46% this year to 22.7p. In turn, this implies a forward PE of just 10.7 times.
The war, of course, threatens more inflationary pressure, starting with fertiliser costs. The shorter the conflict, the quicker the recovery.
Nonetheless, this is an excellent business, with genuine operational momentum. It’s absolutely worth considering, and the risk profile will decrease if the conflict ceases.
