Down stock markets undervalue good companies, and the wise investor knows not to throw out the baby with the bath water. Harvey Jones reports
When stock markets fall, they savage the shares of good companies as well as the bad and, strangely enough, that's great news for investors.
Plenty of strong and profitable global blue-chip companies have tumbled in value in recent weeks, including many world-renowned companies that are still reporting fat profits.
This is a great opportunity to buy top-quality companies at a discount, then sit tight to reap the benefits when their share prices ultimately rebound.
Investing in large global companies isn't risk free, but it should help limit the damage from any further stock-market volatility, especially if you hold for at least five or 10 years.
We asked five fund stockbrokers and wealth managers to name the global blue chips that should help you weather the current storm and make a profit when the sun starts shining again.
Dan Dowding, the chief executive of Killik & Co in Dubai, chooses the German car manufacturer, Volkswagen (VW) Group, to steer him through the crisis. "VW Group is Europe's largest automobile manufacturer, selling nine brands in 153 countries. In 2010, it sold 7.3 million vehicles and has been enjoying strong sales in emerging markets, particularly China," he says.
The company's recent half-yearly company results thrashed expectations, with revenue rising nearly 26 per cent to Ä77.8 billion (Dh386.4bn). "It sold more than four million vehicles in the first half of 2011, the first time it has done that over any six-month period."
VW Group owns nine brands in total: VW, Seat, Skoda, the premium brand, Audi, the luxury brands, Bentley, Bugatti and Lamborghini, and the commercial vehicle brands, VW Commercial and Scania. It is currently planning a merger with Porsche, of which it owns 49.9 per cent. "VW Group expects significant growth in financial services in Eastern Europe, Russia, Asia and Latin America," Mr Dowding says.
The company is split into two main divisions: car production and financial services, such as dealer finance, leasing, insurance, fleet management and direct banking.
The automotive arm produces about two-thirds of the company's profits, while financial services drives the other third. "Integrating automotive and financial services boosts customer loyalty and profits," Mr Dowding says. "Financial services customers tend to change cars more often, an average of 5.5 years versus 7.4 years for cash buyers."
Despite its powerful financial performance, VW Group's share price hit the skids during the latest lap of the financial crisis, crashing from Ä137 to Ä100, a 30 per cent drop. "VW Group is now trading at just five times earnings, which is incredibly cheap. This is a 16 per cent discount to BMW and 28 per cent discount to Daimler, which have a similar global sales base, and a whopping 50 per cent discount to Toyota."
A combination of strong sales growth, especially in the all-important emerging markets segment, a broad product range and cut-price valuation could make now a good time to buy VW Group.
It isn't often you can drive away a Volkswagen at such a discount.
Todd Wenning, the head of dividend investing at Motley Fool, a stocks and shares website, says investors could clean up by investing in Reckitt Benckiser, the global household products company.
The company boasts a shelf full of household name brands, including Air Wick, Calgon, Cillit Bang, Dettol, Disprin, Harpic, Nurofen, Strepsils, Scholl and Vanish, which it sells in more than 70 countries around the world.
Quoted on London's FTSE 100 index, Reckitt Benckiser's share price has fallen to about £32.50 (Dh184.53), a drop of 6 per cent since August 1. "Over the same period, the FTSE 100 fell 12 per cent, more than double that amount, so this stock has defensive qualities. Better still, its shares are trading at a 15 per cent discount to what we consider its fair value estimate," Mr Wenning says.
Reckitt Benckiser is now on a price-earnings (P/E) ratio of 14.7, well below its five-year median price of 18.2 times earnings. "It boasts a strong balance sheet, generous cash flow generation and growth potential for its products in emerging markets."
The stock also pays a decade-high dividend yield of 3.8 per cent. "We reckon its dividend should continue to grow by around 8 per cent a year over the next five years. It is well covered by earnings and Reckitt aims to pay out approximately 50 per cent of earnings as dividends each year. This should give investors a nice mix of dividend sustainability and growth."
Reckitt Benckiser's share price plunged in April following the departure of Bart Becht, its long-standing chief executive. A few months later, Colin Day, the chief financial officer, left the company. "Lingering concerns about the departure of such a successful pair may still be keeping a lid on the share price, but we don't think their departure had much to do with their confidence in the long-term prospects of the company," Mr Wenning says. "We also think their replacements have much better experience of other emerging markets and could help accelerate growth in these regions."
Richard Hunter, the head of equities at Hargreaves Lansdown, says the mobile-phone giant, Vodafone, is a great call in the current market. "Vodafone is a truly global player, with 310m customers around the world," he says. "It is reaping the benefits of this geographical diversification, seeing its strongest growth in Asian countries."
Mobile-phone companies used to be seen as fast-growing growth stocks, but that has changed. "Your mobile phone is an essential part of modern life," Mr Hunter says. "Even when people are short of money, they still keep their mobile. Stocks such as Vodafone are increasingly seen as defensives, which means they should hold their value even in an economic downturn."
Vodafone's share price has dropped by about 10 per cent of late, leaving the company on an attractive P/E ratio of just over 10. "It also offers a dividend yield of 5.4 per cent a year. This looks attractive against the low returns on savings accounts."
Vodafone has been cutting costs and boosting its profit margins. "Strategically, the company has also been divesting itself of its non-core businesses, selling its holdings in Chinese and Japanese mobile-phone operators and returning the profits to shareholders. It is now looking to sell its stake in a Polish telecoms operator, Polkomtel."
There are still plenty of people on this planet who don't have a mobile phone. "Sales still have a long way to go, especially in emerging markets. And as existing users increasingly use their mobile phones to access the internet, data revenue is also growing," Mr Hunter says.
Royal Dutch Shell
The global oil giant, Royal Dutch Shell, is a sure way to play the crisis, says Graham Spooner, an investment adviser at share.com. "In the past, when the West fell into recession, demand for oil would fall and the price would plummet. That hasn't happened this time, largely thanks to continuing strong demand from China and India."
Global oil use has leapt 15 per cent over the past decade. The world is on course to use a record 88.2 million barrels of oil a day this year, according to the US Energy Information Agency. "Demand is rising and oil isn't getting easier to find. Oil exploration can be risky, as we saw with the BP Deepwater Horizon oil spill."
Shell may be a solid and successful global company, but investors should still brace themselves for a bumpy ride, Mr Spooner says. "There is a lot of bad news out there and we don't expect a dramatic stock-market recovery. Its share price has dropped 10 per cent in the recent turmoil and could fall further, but its long-term prospects look good. And while you're waiting for the share price to recover, you can pocket its generous dividend yield of 5.2 per cent a year."
Mr Spooner warns against diving into any stock right now. "The best approach is to drip-feed money into the market, little by little. That way you won't be caught out if you invest a large lump sum and stocks plummet the next day."
Three blue-chip tips
Stock markets may be looking sickly but many blue chips are in surprisingly good health, says Khurram Jafree, the MENA head of investment advisory for Barclays Wealth. "Balance sheets are under control and corporate earnings have been exceptional over the past couple of years. The current correction has produced some really attractive valuations, particularly in developed markets."
Your choice of stocks depends on your personal-risk profile. "Everybody is different and we always recommend our clients spread their money between a basket of different stocks."
With economic growth likely to be slow, Mr Jafree says investors should consider high-yielding equities offering the prospect of strong dividend growth. "We like large caps with good dividend cover, and strong and dependable cash flows. You should also diversify between different sectors and geographical areas."
Mr Jafree picks out three companies that should endure the current crisis, starting with Chevron Corporation, the US-listed oil major. "Chevron is down more than 11 per cent from its 12-month high and now offers a steady dividend yield of 3 per cent. When markets recover, investors could enjoy a healthy double-digit return."
His second choice is General Electric, the US-listed industrials giant. "GE's share price has fallen 27 per cent from its 52-week high, putting it on an attractive yield of 4.2 per cent. This is a major global business, with large exposure to growing emerging markets, notably Asia. Given time, it should also yield double-digit returns."
Mr Jafree's final pick is Merck, the global healthcare company. "Its share price has fallen 15 per cent from its year high, and it is now yielding 4.75 per cent. Merck is a solid pharmaceutical company and right now, you can buy it at an attractive valuation."
Before investing in any stock, Mr Jafree says you should take currencies into account. "Otherwise, you are adding currency risk on top of share-price risk. For most of our UAE-based file clients, the US dollar is the primary currency because of the dollar peg."