Today’s general stock market weakness and increased volatility are perhaps to be expected with the background of the coronavirus crisis.
But I’d handle the situation by focusing on the news coming from good-quality businesses. Sometimes the market can pull shares down even when underlying trading in the company remains steady.
Stock market weakness can lead to opportunity
Indeed, many businesses have defensive, cash-generating qualities that can remain little affected by the ups and downs of the wider economy. I reckon those stalwarts can make good vehicles for compounding your way to wealth over the long term. So I’d aim to buy their shares during periods of general stock market weakness.
I like the look of FTSE 250 fast-moving consumer goods company PZ Cussons (LSE: PZC). The company has continued to trade through the crisis and updated the market on 16 April. In the narrative, the directors said the impact of Covid-19 on the business has been “significant” but varies between regions.
In the UK, for example, there’s been “exceptionally high demand” for the firm’s Carex and Imperial Leather brands, which offer hand wash, sanitiser gel products and soap. But social-distancing measures in the UK, US and Europe have “severely impacted” the firm’s beauty products business.
Meanwhile, in Indonesia, trading has carried on “largely as normal” with increased customer demand for hygiene-related products offsetting a reduction in sales of some lotions and creams. And the company saw a spike in demand for its Morning Fresh and Raffertys Garden brands, as well as “a severe reduction” in sales of beauty products.
Recovery and growth potential
In Nigeria, PZ Cussons had been experiencing difficult trading for some time and the pandemic is making things worse. However, I reckon the share price already compensates for weakness in the region. The recent disposal of the troublesome Nigerian milk business for $20.3m will have eased some of the problems.
Last year, the company made a small operating loss in its Africa operations. There’s potential for a recovery in profits in the years ahead, which could boost the share price. And there’s also the potential for the company to divest, or close, more of those poor-performing operations. Either way, the lack of profitability already looks like it’s factored into the share price to me.
Looking ahead, the directors reckon earnings for the full trading year to 31 May will come in at the lower end of previous expectations. Meanwhile, with lockdowns easing, I think there’s potential for trading to stabilise and improve.
Despite the challenges, PZ Cussons has maintained the shareholder dividend for the past few years, including now. And with the shares near 179p, the forward-looking earnings multiple for the current trading year to May 2021 is just over 15. And the anticipated dividend yield is a little below 4.7%.
I see this as a potential defensive long-term play with recovery and growth potential.
Kevin Godbold has no position in any share mentioned. The Motley Fool UK owns shares of PZ Cussons. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.