Has The Bear Market Given Investors An Opportunity To Buy Lloyds Banking Group plc, NEXT plc & The Restaurant Group plc On The Cheap?

Here comes the bear

After much speculation in the press, the technical bear market arrived last week with the FTSE 100 falling by 20% from its April highs of over 7,000 points to sub-5,700 points last week. For those of us that don’t know, a bear market is defined as:

A market condition in which the prices of stocks and shares are falling, and widespread pessimism causes the negative sentiment to be self-sustaining. As investors anticipate losses in a bear market and selling continues, pessimism only grows. Although figures can vary, for many, a downturn of 20% or more in multiple broad market indexes, such as the FTSE 100 or the S&P 500, over at least a two-month period.

Although bear markets can be very scary to most, they can throw up some interesting opportunities to those prepared to cut through the noise and buy good, profitable companies that have been unfairly marked down.

Today, I’m going to run through three companies that have suffered more than most of late. As the chart clearly shows, the shares have fallen out of favour well in excess of the market over the last three months.

Bank to the future

Anyone who invested in UK-focused banking giant Lloyds (LSE: LLOY) will be licking their wounds with a disappointing share price performance over the last 12 months. Indeed, the shares have even managed to underperform the falling FTSE 100.

However, with general pessimism rather than company-specific issues, I think investors could find themselves with a decent entry or top-up point as the bank works through its issues and returns to full health.

I understand that the level of profitability is reliant on a resilient economy. But I think the shares, which currently trade on a forecast 12-month rolling P/E of less than 10 times earnings and are expected to yield over 5%, are well worth considering.

Out of fashion?

Holders of shares in clothing and homewares retailer NEXT (LSE: NXT) have seen a steady downward trend over the last seven weeks as the shares fell from all-time highs reached in December to a broadly similar price as January 2014.

Investors have been selling the shares in increasing numbers following the slightly disappointing Christmas trading update coupled with a general market sell-off. However, management seems to feel that the shares represent good value as NEXT has spent over £125m buying back over 1.8m shares for cancellation.

Despite the poor trading, in my view NEXT is still a sound company with shareholder-focused management. The shares don’t scream cheap at around 15 times forecast earnings, according to Stockopedia, but you have to pay up for quality.

A spot of indigestion

Investors in the restaurant and pub chain Restaurant Group (LSE: RTN) found the Christmas update hard to swallow. This sent the shares crashing to lows not seen since 2013 as management signalled slowing like-for-like sales growth and struck a cautious note as the UK contemplates its future in the EU.

However, management was quick to point out that the group generates significant cash flows and is still planning on opening around 40 new outlets during the course of 2016.

The sell-off has left the shares trading on a forecast P/E of around 15 times earnings and yielding a 3%-plus payout. Interestingly, the dividend here has grown at a compound annual growth rate of 14%, which isn’t too shabby at all.

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Dave Sullivan owns shares in Next and Restaurant Group. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.