Written by David Walker, StocksInValue; with insights from Clime Asset Management.
Last week we presented at StocksInValue’s event in Brisbane, Melbourne & Sydney.
During the Q&A, many admitted they were too scared or discouraged to invest during the current equity market correction and would rather wait for the market to go back up. But as we highlighted in our Investing Report last week titled, ‘Opportunities as the market corrects, we believe this is the time when investors should be more interested in equities – lower entry prices mean higher rates of return.
Consider the following simple arithmetic example. Should Commonwealth Bank’s share price go to $100, an investor who paid $80 (a price recently available in the market) will earn a return of 25 per cent. An investor who waited for a more optimistic equity market and paid $90, will earn just 11 per cent – that’s less than half the rate of return. This is the high price of waiting to feel better before investing.
Unfortunately the instinct to back away from equities during periods of pessimism is widespread. Deep down, people crave validation from others and feel more comfortable acting with the crowd. In our evolutionary past, co-operating with the group was essential for survival.
But the best investors know they must override these emotions to maximise returns. Superior investment opportunities are available during market corrections when fear of loss stalks investors’ minds and quality companies become available at fair prices.
Figure 1
Sure enough, our stock valuation tool – StocksInValue’s filter, ‘In Value Today’ is throwing up a larger number of undervalued stocks than when our market was trading over 5,950. A significant number in the lower risk category and quality Australian names such as CSL and Woolworths. One other, Flight Centre Travel Group (FLT.AX).
The popular travel agent delivered a total shareholder return of 27 per cent per annum over the last five years – a solid performance in the volatile travel industry. Apart from entrepreneurial management with deep experience of the travel market, FLT’s longevity and national store presence create brand equity which attracts travellers seeking advice and packaged holidays. Contrary to many expectations, digital disruption has not crippled FLT.
In 2014 business volumes in Australia took a hit from the plunge in consumer confidence after the 2014 Federal Budget. The stock was good buying before this year’s Budget and our ASX model portfolio took a position on 20 April. FLT is currently being rerated as the market becomes more confident about the future and earnings are upgraded after last year’s downgrades.
FLT is well-positioned to perform, with stronger Australian outbound travel as the population ages and more retirees seek advice on international travel. At time of writing, FLT is currently trading around $42 and we think the stock is worth about $46.
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