December was a month of two halves. The first half so a continuation of the sector rotation seen in November as the market sold off defensive stocks in favour of growth stocks. The second part of December saw the santa rally come to town and it was a case of a rising tide lifts all boats. Most stocks ended December higher even those that got sold off in the first two weeks.
Luckily for me, my monthly stock purchase programme occurs in the first half of the month and so I was able to buy shares at decent valuations before they rose. The stocks I purchased in december were PZ Cussons, Unilever, Capita, Vodafone and Glaxo Smithkline (GSK). The first four purchases were me building on existing positions with GSK being the only new position.
In specific, this is how many shares I bought of each company:
- PZ Cussons – 68 shares at 313p a piece.
- Unilever – 5 shares at 3200p a piece.
- Vodafone – 77 shares at 200p each
- GSK – 11 shares at 1500p each
- Capita – 34 shares at 460 p each. Even though Capita shares continues to fall in price, I continue to be a buyer and I am confident that I will make double digit returns in this business. See more below.
In total, I have spent £850 making these purchases including costs. For this, I expect my annual dividend income to increase by £38. Not a bad yield of 4.47% across the board.
Don’t confuse underlying business performance with share price
The award for the biggest loser of the FTSE 100 in 2016 goes to Capita. The company had been a stock market darling before its precipitous fall. The stock rose from 1,030p at the beginning of in 2014 to 1,208 p at the end of 2015. But the wheels began to fall of in 2016. Capita’s share price has crashed over 60% due to profit warnings and the outsourcing sector being out of favour.
But whilst Capita’s business is definitely in a spot of bother at the moment, I do believe that investors have been too quick to rush to the exists and send the share price cratering to levels that have made it unconnected tot he underlying business performance.
At current levels, Capita seems to be an attractive value play. The market is currently pricing in a worst case scenario of a dividend cut and an equity raise. But looking at the company’s Free Cash Flow, the dividend well covered and there is sufficient cash to pay off the huge debt load. Furthermore, the underlying business is still in good shape as it provides services that are in demand no matter the economic outlook. Capita still has a fantastic core base of earnings.
When looking at the big picture, it is easy to see that Capita’s share price has fallen more than its reduced earnings guidance should warrant . The market looks to be too fearful on Capita right now. Management even knows this and that is why you have seen a lot of insider buying. It is in times like these where long term wealth is build. Buying Capita at these prices will give you a high probability of getting double digit returns going forward.
Another company that is currently facing this phenomenon of its share price not reflecting the underlying business is Gilead. The company is currently trading at a P/E of just 6! This means that the market is valuing the company as if it is going bankrupt in 6 years. This is ridiculous! Gilead is the most profitable company in the biotech sector by a large margin. Even if its profits were to be cut in half due to the current declines of its HCV franchises, the company will still be more profitable than the majority of the company’s out there.
At this point in time, it makes no rationale sense for Gilead to be trading at these depressed P/E levels. Other biotech’s who are also facing similar percentage declines as Gilead are trading at much higher valuation multiples.
But as a long term investor, I am not complaining about Gileads beaten down stock. In fact, I am hoping that the stock stays at these depressed levels for longer. This is because Gilead currently has a huge buy back programme and the longer shares stay as these levels, the more shares the company can retire. As the share count decreases, my ownership stake in the company increases and thus I can lay claim to a greater amount of profit.
The only times you should worry about falling stock prices are in the following instances:
- When the underlying business is failing.
- When a company is looking to raise equity.
- If a company wants to conduct mergers and takeovers with its own shares.
- If you are a trader looking to make a quick gain.
Besides these factors, falling stock prices should not bother you too much. In fact you should cheer for them in you are a net buyer of stocks. So stop worrying about the daily movements of shares you are invested in. Instead, study the business and aim to profit from the mismatch between shares prices and the underlying economic performance of a business.
If you’ve done your research and calculated a businesses intrinsic value, don’t let the markets gyrations put you off. When I first bought shares in Zambeef, it was trading at 12p. After my purchase the price kept falling all the way down to 6p. I could have panicked and sold out. But I knew I had done the research and Zambeef was worth more than this. So I kept buying all the way down to 6p. Today my high conviction on the stock has been rewarded as shares in the company are trading close to 19p. All in, I am up over 100% in the stock in just under 2 years.
Now I am not saying that just because the share price of a company you owns falls, you should rush out and buy more shares. Rather I am saying that check whether your original investment thesis still holds. Do the reasons as to why you originally bought the shares still hold true. Has their been any significant change in the nature of the business? Does the market price still underestimate the intrinsic value? If you can answer questions like these confidently, falling share prices should give you the opportunity to load up on a companies shares and subsequent ally enjoy the rewards when the market comes to its senses.