Note to Market: Please Crash
10/26/2012 9:30 am EST
Let's hope for a dip, so we can start loading up on cheap stocks again, prays Harvey Jones of The Motley Fool UK.
Time and time again when deciding whether to invest in a stock, I find myself thinking, "if only it was a little bit cheaper."
I thought it just the other day, when writing about Unilever (UL). This household-goods giant is cleaning up in emerging markets, which can't get enough of brands such as Knorr, Lipton, Ben & Jerry's, and Dove soap. Better still, it yields 4%.
There's only one thing wrong—it costs too much. Trading on a price-to-earnings (P/E) ratio of 18, I fear the potential for further capital growth is limited.
Dash for Crash
I've been thinking that a lot lately. Too many stocks I've been sizing up just look that little bit too expensive.
That's largely down to the summer rally, which saw the FTSE-100 leap more than 12% to around 5,900, and some stocks doing far better than that. Barclays (BCS), for example, leapt 50%.
I hate paying over the odds for a stock or getting suckered by a short-lived rally. As far as I can see, only one thing can resolve my predicament: a market crash.
Crash from Chaos
Global drink giant Diageo (DEO) is a great example. I have a healthy swig of it in my portfolio, and I really fancy one for the road. But the price of its recent success is high, leaving it on a P/E of over 17 times earnings and a dividend of just 2.2%. It's a pricey time to take a top-up.
I'm not asking for a repeat of autumn 2008. A mere 10% sell-off would bring many of my favorite companies back into range. Is that too much to ask?
There are plenty of reasons for stock markets to take a tumble. European Central bank chairman Mario Draghi hasn't begun to solve the Eurozone crisis, despite claiming to do "whatever it takes" to save the stricken currency.
We could still suffer a Chinese hard landing, with the country's GDP growth shrinking again this month to 7.4%. Finally, there is that great unknown, the US fiscal cliff, which could wipe out anything up to 4% of the country's GDP, and plunge the world back into recession. It's looming closer every day.
Oh, I almost forgot the potential for conflict in Iran...
I don't really fancy buying a company at 18 times earnings when the outlook remains so volatile.
I could certainly do with a banking stock sell-off. In fact, I think one is overdue.
As I mentioned, Barclays is up 50% since July. Lloyds Banking Group (LYG) is up 35% and RBS (RBS) is up more than 40%. The banks are set to remain volatile for some time yet, and I want to buy on a dip, rather than a rally.
Note to market: please crash.
A wider market sell-off is a better time to buy than a stock-specific slump.
Take FTSE fashion favorite Burberry Group (London: BRBY). Its share price recently fell by around one-third, thanks to falling demand from China. But that doesn't make it better value. Mostly, it suggests it was overvalued before.
Burberry may still be a buying opportunity—and indeed the stock has rebounded 15% in the last couple of weeks. But that's not the same thing as a mass sell-off that punishes the good stocks along with the bad.
There are other fallen stocks out there. Tesco (TESO) is down more than 25% this year, taking its yield to a tempting 4.8% and putting it on a forecast P/E of 9.5 times earnings for February 2013. It doesn't need a market dip to look better value than it was. It just need a few years to recover.
But if the market fell, it wouldn't be the first supermarket I'd buy. I'd head for the tills at retail rival Sainsbury's (London: SBRY), which has thrashed Tesco lately. That's a stock I'd like to pluck from the wreckage of a crash.
When I look at the shares I bought on one of last year's dips, it makes me long for another repeat. Medical appliances company Smith & Nephew (London: SN) is now up 25% since I bought it, giving me plenty of cover against future turbulence.
It's been a mixed year for miners such as BHP Billiton (BHP), but because I bought it directly after it had slumped 30%, I have been insulated against excess damage.
I'm not being greedy. I don't want to tempt fate. What we need now is a good old-fashioned dip, so we can start loading up on cheap stocks again.
A mere 10% dip would do it. 15% would be better. Just as long as it took Unilever, Diageo, Barclays, and Sainsbury's with it. Oh, and Vodafone (VOD). And Scottish engineer Weir Group (London: WEIR)...
OK. Now I am being greedy.Read more from The Motley Fool UK here...