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Buying Opportunity for the Brave?

It takes great nerve to buy in as markets fall rapidly but the current level in the market allows for a fair amount of bad news, says Morningstar columnist Rodney Hobson

Rodney Hobson 23 November, 2012 | 5:48PM

Invest Like a Crab
There is no need to be crabby about the gyrations in the stock market. Just keep moving sideways.

Once more we have witnessed several days of sharply falling share prices followed by a massive one-day upward movement as bears scramble to get back in. We have seen this scenario—and the reverse effect when the bulls have gained temporary ascendancy—so many times over the past three years.

Little, on balance, had changed over the weekend. There were slightly more optimistic noises coming out of the United States over a compromise to avoid the fiscal cliff but nothing concrete.  On the other hand, there were slightly more pessimistic noises coming out of Europe about bailing out Greece but nothing concrete.

So why was there a 2.4% leap in the FTSE 100 index? Simply that each time there is a big sell off the market takes fright that it may have overdone things.  This time last week it was hard to believe that the FTSE 100 would, within days, be pushing to top 5,800 points again.

It takes great nerve to buy in as markets fall by up to 400 points but the current level in the market allows for a fair amount of bad news. I attended a meeting of the London Press Club at which the US ambassador indicated that there have been genuine moves to reach a compromise on the fiscal cliff. I share his optimism.

Once more there has been a great buying opportunity for the brave. I remain fully invested.

A Catalyst for Growth
I’ve had a fair bit of bad news with my investments of late, with two issuing a profit warning and one reporting a fall in profits. It shows the value of spreading risk, as my portfolio overall is still well ahead, as is Johnson Matthey (JMAT), which has been hit by falling prices for precious metals.

The specialist chemicals and precious metals group saw its shares fall 135p to 2,190p after reporting interim profits down 6% and revenue down 17%. This was in line with previous guidance. What spooked the markets was that the outlook for the second half is more of the same.

It is frightening when shares fall by more than £1 but one has to bear in mind that this was the equivalent of a 10p fall in the share price of a company trading at 230p.

The cautious outlook may, however, be overdoing the gloom. Strikes in South Africa have disrupted supplies of platinum, and with demand likely to remain flat there will probably be a shortage of the metal, used in catalytic converters, early next year.

Significantly, Johnson Matthey has raised its interim dividend from 15p to 15.5p, a small increase but hardly a sign of a company in discomfort. The shares bounced back 99p next day, so well done anyone who grabbed the opportunity to get in at the bottom.

My holding was still showing a profit after the fall, and that does not count in the dividends I have received so far. I am staying in for the long term and while I think that the shares are fully valued at the moment they could prove a good buy if they dip again.

Morningstar has a 2,200p fair value estimate on the stock.

More Than One Lifeline
Investors who take any notice of what I say will have stayed well clear of Ocado (OCDO), the ailing food delivery operation that began life as part of Waitrose. How happy the John Lewis Partnership, owner of Waitrose, must be to have dumped this albatross onto the public.

Ocada shares fell after it emerged that it needed to renegotiate with banks on £100 million of debt but bounced back when the company was able to raise £36 million separately in a placing that persuaded the banks to stay on for the ride.

Getting on the wrong side of your bankers is never a good idea. First of all it tends to be expensive—the placing alone cost £1 million in fees to investment advisers Goldman Sachs and Numis—and the lending banks are apt to ratchet up their charges once you show signs of weakness.

Secondly it sends a warning to the banks, who will be reluctant to throw more good money after bad, and to creditors, who will be more reluctant to extend credit terms.

Ocado has been thrown a lifeline. The rise in the share price this week is also a lifeline to shareholders looking for a chance to get out. Even now, the placing has been at a measly 64p compared with 180p at flotation two years ago. The shares are in my view still overpriced at around 74p, a full 10p above the placing price. It is not too late to get out.

Market Performance (November 19 - 23)

  • FTSE 100 Index: +3.81%
  • FTSE 250 Index: +2.69%
  • FTSE All Share: +3.62%
  • FTSE Small-Cap: +1.75%
  • FTSE AIM 100: +3.08%
  • FTSE Fledgling: +0.83%

 

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Rodney Hobson is a long-term investor commenting on his own ideas and portfolio; his comments are for informational purposes only and should not be construed as investment advice.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating
Johnson Matthey PLC3,351.00 GBX-0.21
Ocado Group PLC381.50 GBX4.15-
About Author Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, most recently The Dividend Investor.