There comes a point during any major stock market correction when many investors (myself included) think about buying into leading companies whose shares have fallen during the stock market sell-off. The theory is that blue-chip stocks offer good value around the bottom of a market correction and that they will provide a healthy return to investors who are patient enough to wait for the stock market to recover.
Of course timing when the stock market correction has bottomed out is not easy to do and there is also no guarantee that all blue chips stocks will rise even if the market does recover. Some stocks for example may actually be in a phase of cyclical decline and even if the wider market was to rally, they may keep heading in the other direction!
Having said that, it’s unlikely that the ASX 200’s fall from nearly 6000 hasn’t resulted in some good companies having their shares oversold. So as we draw to the end of another volatile week let’s have a look at just a few stocks that may offer investors long term gains.
BHP Billiton Limited (ASX:BHP)
Unless you have been on a remote island without access to the internet you would know that BHP shares have been sold off heavily from May this year and have recently struggled to hold above $20 a share. The days when BHP stocks seemed set to soar well past $45 are behind us and I doubt we will see them at that level again for some years. However it’s still a well managed and well diversified global resources company which pays a very respectable dividend.
At $22.70 a share the dividend yield for BHP is 7.8% and is fully franked. That’s quite a decent return even if the stock price goes nowhere – assuming that is, that the dividend payout at the current level is maintained. The Price to Book (P/B) ratio is now at 1.36 and the Price to Earnings ratio is currently around 16.4 – so the stock is not what I would call unbelievably good value, but it’s worth looking at.
On the downside the Return on Equity (ROE) is now just below 10% which is way below the glory days of 2006-2008 when it was above 40%. In addition BHP may be entering a period of cyclical earnings decline although I think a lot of this is already priced into the shares at the current price.
Macquarie Group Ltd (ASX:MQG)
Shares in Macquarie Group held above $80 and resisted the market correction for some months before taking a rather abrupt stock price hit in August. At around $78 per share the yield on MQG shares is approximately 4.6% and is 40% franked – not as high as BHP but still quite good taking into account the low interest rate world we live in at the moment.
In terms of value MQG shares at moment have a P/E of 14.39 and a P/B of 1.80 which like BHP doesn’t exactly make them unbelievably good value but again I’d say the stock is worth looking at. It’s also worth noting that Macquarie Group’s ROI is 11.5% which is quite good.
The big question is – are banking and financial stocks near their cyclical peak? If so then MQG stocks may not provide above average returns over the next few years.
Woolworths Ltd (ASX:WOW)
Shares in Woolworths Limited have been sliding downwards now for 12 months and much of the damage to the company has been self-inflicted. But it’s a blue chip defensive stock that pays out a healthy, fully franked dividend of around 5.7% and now that its share price is back down to around $25 I reckon it’s worth studying more closely.
The P/E ratio for WOW at 12.75 is lower than BHP or MQG but the P/B ratio at 2.83 is higher than both these stocks. What I really like about Woolworths however is their ROE which is around 22%, and it’s been at around that level for the last decade. That suggests that all things considered, the company is usually well managed.
To be really tempted I’d like to see WOW shares get to around $22, but even at the current price I believe the stock offers value.
But please remember that as always, I am not suggesting investors buy these or any other stocks and I strongly urge that readers do their own research and seek competent investment advice as needed.
Disclosure: This article was written by Greg Atkinson who is the Managing Director of Ohori Capital. Greg is from originally from Sydney but now works and resides in Japan.