UK Edition
Questor: benefit from the stock market rollercoaster and buy these four stocks at bargain prices
When markets have a panic attack, the sensible investor looks around for bargains. Perhaps the best way to do this is always to have a shortlist of stocks of interest at the ready so that, when markets take a tumble, you quickly buy the ones that have fallen furthest.
Questor has such a list in the form of all the shares it has tipped as a buy over the past year or so. Many of our picks are still well above the price at which we tipped them but a few good companies seem to have been harshly, and unjustifiably, punished. Here we highlight four.
RWS is one of Questor’s favourite businesses. To us it has an unassailably strong position in its chosen niche of patent translation and a proven model of organic growth, supplemented by judiciously chosen acquisitions. Our only concern has ever been valuation.
But by the close on Tuesday the shares had fallen by about 22pc since a recent peak of 495p on Jan 8. “At times [on Tuesday] they were trading at less than 20 times earnings, the first time that has happened since the financial crisis,” said Richard Power, a fund manager at Octopus Investments.
Keith Ashworth-Lord, manager of the SDL UK Buffettology fund, said: “Nothing has changed at the company. An AGM statement is due on Feb 13 and I don’t expect anything other than a positive update. The share price falls probably represent profit taking in a nervous market following a strong run.” Buy.
We are also fans of Rentokil, the rat-catching firm. A new management team is focusing the business on its core skill of pest control and improving efficiency via selective acquisitions at reasonable prices. However, the market doesn’t seem to have given it much credit: the shares closed 3.4pc below where we tipped them in September last year. Buy.
We tipped Imperial Brands, the former Imperial Tobacco, only last month but by last night's close the shares had fallen by 12.7pc since then. We were impressed by the investment case set out by Ben Preston of Orbis Investments, who pointed out that tobacco firms had defied seemingly adverse conditions for many decades and benefited from being able to raise prices and cut costs simultaneously. Buy.
Our last bargain is Sainsbury’s. We tipped it in March last year, pointing to its low valuation relative to peers, and reiterated the advice last month, when we suggested that its failure to make headway was a reflection of Brexit-induced aversion to domestically focused British stocks. The shares closed on Tuesday 9.8pc lower than at the time of the first tip and 1.2pc down on where we tipped them in January. Buy.
Update: Capita
Now it’s time to cover a stock that actually rose yesterday: Capita’s shares stood out from the crowd with an 11.3pc gain.
However, at 193¾p they are very far below the 669p at which we tipped them as a hold in October 2016. We did so on the basis of a decision by Neil Woodford, the high-profile fund manager, to retain them in his Woodford Equity Income portfolio despite a profit warning that had sent the shares sliding.
Woodford admitted last week that the decision had been a mistake, and we must follow suit in connection with our original “hold” advice and several later updates on the same lines. But does it follow that we should now sell the shares?
Woodford said: “A decision to sell Capita here is almost impossible to justify.” He pointed out that the firm had a new management team, which had announced plans to shore up its finances by scrapping the dividend and selling new shares – and to improve operations by simplifying the group’s structure.
“This is a complete reset for Capita. The new chief executive has mapped out a clear new direction of travel and it is one with which I completely agree,” the fund manager said. He acknowledged that the market hated outsourcers in the wake of Carillion’s collapse but said “the only other similarity between Capita and Carillion is the first two letters of the name”.
Woodford concluded: “The mistake I made was owning Capita in 2016. It is not a mistake to own it now. I would go as far as to say that the business will be in better shape at the end of 2018 than it was in 2016. It will have infinitely better leadership, a stronger balance sheet, better cash flow, more conservative accounting policies and a lower pension deficit.
“I will not be compounding the previous error by [selling] now.” Hold.