Selling Tesco? You must be mad.
It's in times like these that I'm minded of Sir John Templeton's theory of Maximum Pessimism, which recommends that the best time to invest is when the blood is running in the streets -- figuratively, anyway. We need to be buying shares when nobody else wants them, and people are so scared that they're selling off the best of our really great companies at stupidly low prices.
Are we at such a low point now? Let's consider what we've seen so far.
The last boom
Towards the end of the last bull market, speculative investments were popular, with plenty putting their money into small-cap companies with great growth prospects in the hope they'd turn into multi-baggers in short order.
Oil and minerals were big, too, as the economic powerhouses of the developing world -- most notably, China -- were steaming ahead and were expected to be insatiable in their hunger for energy, metals and all the rest.
But since the crunch hit, all that kind of stuff has lost some of its shine; investors have refocused on companies that are more defensive and safer over the long term. So maybe China won't want 20% more iron next year, but people still need food, right?
In short, there's been a flight to quality, which is pretty much what happens whenever markets turn bearish. (But it does beg the question of why we don't just stick to quality all the time.)
Fleeing too far
The trouble is, when you're worried about the economy, bearish about shares and scared of losing money in your investments, what do you sell when you've already dumped your riskier shares and put the money into safe ones?
That fear seems to be here now, and people are selling off the quality stuff, like Tesco (LSE: TSCO). Sure, we just had a profit warning, but to put that into perspective, it was a one-off miscalculation over the dropping of special promotions and going for the "Big Price Drop" approach instead. The result was a 20% drop in the share price, leading to Warren Buffett filling his boots with more cheap shares.
Looking at the company news schedule for this week, I see another company that I consider to be a quality one, but which has also been deserted by shareholders of late, and that's PZ Cussons (LSE: PZC), which will report interim figures on Tuesday. It's a defensive company, has grown its earnings and dividends right through the crisis, but has seen its share price fall by 15% this year to 316p -- though, to be fair, it did look overvalued earlier in 2011.
The search for quality
What other quality companies out there are unfairly depressed? Here's a handful selected from the FTSE 100 that have strong dividends forecast for 2012, but which have seen their share prices fall over the past year. (Falls are from the peak prices attained in 2011, and share prices are last close of play.)
There are some pretty big falls there, and some surprisingly high dividend yields. In fact, that table looks more like a bunch of high-risk small caps to me than some of our biggest companies. Of course, if a company is heading for a tough patch, City forecasts will lag the market sell-off and, for a while, dividend yields will look unrealistically high before they are eventually slashed.
Down and outs?
But are these really 10 companies heading for a wipeout? I seriously doubt it. I'm not saying to rush out and buy them all without proper research, and one or two might be justifiably down. But I do think that overall they are more likely to be companies whose shares have been oversold as the current pessimism takes a disproportionate hold -- just as it did with Tesco, providing the very opportunity that Mr Buffett was waiting for.
Are we at a point of maximum pessimism now? Well, we're not in quite the panic state we saw at the worst point of the slump back in 2008/9, but all the indications are that irrational pessimism is overshadowing longer-term optimism right now, and the early part of 2012 could be a golden opportunity to buy up good quality shares cheap.
Have you been snapping up any quality bargains during this pessimistic time? Do tell us what they are, below.
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> The Motley Fool owns shares in SSE and Tesco.