This Is Not The Time To Abandon Quality Shares

Published in Investing on 23 January 2012

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.)

CompanyDividendShare priceFall from peak
Man Group (LSE: EMG)12.1%120p61%
RSA Insurance (LSE: RSA)9.3%108p25%
Aviva (LSE: AV)8.4%342p28%
BAE Systems (LSE: BA)6.2%314p13%
ICAP (LSE: IAP)6.4%323p43%
SSE (LSE: SSE)6.4%1245p13%
J Sainsbury (LSE: SBRY)5.9%288p27%
Centrica (LSE: CNA)5.8%283p18%
British Land (LSE: BLND)5.3%490p22%
Tesco (LSE: TSCO)4.6%327p25%

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.

> The Fool's latest report has just been published! Make sure you don't miss '10 Steps to Making a Million'-- it's free!

More from Alan Oscroft:

> The Motley Fool owns shares in SSE and Tesco.

Share & subscribe

Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

goodlifer 23 Jan 2012 , 3:43pm

"What do you sell when you've already dumped your riskier shares and put the money into safe ones?"

To be perfectly serious for once, why on earth would you want to sell anything?

zoolook 23 Jan 2012 , 4:45pm

The "Blood running" quote is attribited to John D Rockefellar.

Templeman's most famous coup was shorting Dot.com companies just before the bubble burst. Maybe he had a vision that blood was about to run on the streets.

I'm sensing optimism rather than pessimism at the moment, but it is only Monday.

vinchainsaw 23 Jan 2012 , 5:29pm

I feel the point of maximum pessimism has unfortunately passed...

jaizan 23 Jan 2012 , 6:36pm

The Carrefour share price has more than halved in the last 9 years.
Why is Tesco considered to have some kind of competitive advantage over a similar competitor?

All I see from Tesco is misjudged overseas expansion & things going to pot in my local store. When they don't stock the shelves properly, then the till staff are slow & demotivated, I am inclined to go elsewhere.
As a shopper, I find local Sainsburys, Asda & Lidl stores all better run.

HighbrowNick 23 Jan 2012 , 6:50pm

Looking at the table above, I think Sainsbury might be a better deal than Tesco! Better dividend yield and forecast EPS growth of 9% for year to 2013.

There will probably be little growth in Tesco, as management decimates the UK business in the interests of cost cutting.

Selling Tesco? Yes. Mad? We'll see!

MDW1954 23 Jan 2012 , 7:07pm

HighbrowNick,

Tesco management has said it is going to invest significant amounts in the UK business, which accounts for over two-thirds of profits. Not cut back!

Fool writer Malcolm Wheatley (not article author)

TMFBoing 23 Jan 2012 , 7:21pm

The "Blood running" quote is attribited to John D Rockefellar

And there I was thinking I'd just made that bit up myself ;-)

I guess we have all sorts of snippets hidden in our memories, ready to pop up long after we've forgotten where we got them from.

Foolish best,
Alan

ANuvver 24 Jan 2012 , 2:15am

"Blood running" is just a retread of Nathan Rothschild's "buy on cannons, sell on trumpets". Or famously in his case, sell when your agent has had a clandestine advance peek at the brass parts and ridden a dozen horses half to death to let you know...

If this is "the time of maximum pessimism", then what exactly was last August?

ne11y 24 Jan 2012 , 3:33pm

I sold shares which hit their stop loss levels and re-invested in high dividend 'secure' stocks in September/October. Clever? I'm down 10% since. Dividends don't seem to match the yields featured in Motley Fool stories. I don't know whether I am a Motley Fool but I feel like a real fool!

JGH03 24 Jan 2012 , 3:47pm

... all the indications are that irrational pessimism is overshadowing longer-term optimism right now ...

Given that the FTSE100 has recovered about 75% of its July - August fall I'm not sure I'd agree with that statement.

JeremyBosk 25 Jan 2012 , 3:34pm

Some of these shares are down for a reason. The Nigerian religious mania will make life difficult for PZ Cussons for years to come. Guiness makes a lot of money in Nigeria and must be a prime target for the Muslim terrorist movement..

Join the conversation

Please take note - some tags have changed.

Line breaks are converted automatically.

You may use the following tags in your post: [b]bolded text[/b], [i]italicised text[/i]. All other tags will be removed from your post.

If you want to add a link, please ensure you type it as http://www.fool.co.uk as opposed to www.fool.co.uk.

Hello stranger

To add your own comment, please login.

Not yet registered? Register now.