Find bargain shares amid market mayhem

15 August 2011

However hesitant some investors might be right now, there are others who are making the most of the one silver lining in the economic storm and buying up cheap shares.

Sitting it out for a while longer to see how much further the market will fall means you are likely to miss out on some bargains now. Even worse, if you wait for it to recover you will probably have missed the boat entirely.

The wisdom of buying low is obvious. But while many stocks are lower, not all of them are bargains. Those which were overpriced to start with are now just levelling off.

Look for financial strength

"Whether there are currently bargains depends on your view as to the likelihood of a downturn," says Edmond Jackson, private investor and resident stockpicker for Interactive Investor.

Jackson says that if you are wary, then the type of equity to consider is a big company with a global reach - especially in the faster-growing economies - that has a strong dividend record and yield (proof of financial strength and limiting downside risk in the stockmarket).

Read: How to successfully play the stockmarket

With this in mind, he points to GlaxoSmithKline and Unilever, both of which recently featured among his stocks to watch.

"Their overseas revenues diversify risk from sterling/the UK, and the products are relatively resistant to recession. This isn't really bargain-hunting though - more defensive tactics to preserve capital and secure income, amid zilch returns on cash and sterling weak."

If you're ready to dive in, then Jackson says the potential bargains are among hard-hit cyclicals. For example advertiser WPP, recruiter Michael Page, and various oil/mining shares.

"The tricky aspect here is cyclicals often looking tempting after a plunge in the stockmarket, at the early stages of an economic downturn. So if the problems in the US, Europe and increasingly China, mean recession, then profit downgrades follow and modest forward p/e multiples suddenly become pricey. If not, then big re-ratings look likely in due course."

Reap from retail

"If pure safety and a decent yield is the criteria then Marks and Spencer is a very good investment at this level," says retail analyst Nick Bubb at Arden Partners.

He also likes stationer WH Smith, pointing out that while the group's tricky high street division is not attractive, this is more than made up for by its travel division, where a stronghold on railway stations and airports delivers stellar results.

"If you want an ultra-cheap growth stock, then SuperGroup is the stock for you," he adds.

Full-year results for the trendy fashion chain were broadly in-line with forecasts, and many brokers have retained their 'buy' ratings, but some analysts, including Merchant Securities' Amisha Chohan, have noted their caution over current trading and slowing growth.

Peel Hunt has a 'buy' rating on the stock at the moment, but analyst John Stevenson recently noted that the combination of warm weather and markdowns across the high street are two factors that have not favoured SuperGroup historically.

Even so, Interactive Investor's head of retail derivatives Mike McCudden also singled out the company as a current bargain, noting that it appears to be "recovering well from its recent hammering, while remaining cheap at 930p".

Meanwhile, Bubb's retail stocks to avoid at the moment include "global powerhouses like Kingfisher and Inchcape which look very oversold".

Another retailer to steer clear of for now is Carpetright, according to Anthony Grech, head of research at IG Index.

Riot damage aside, Grech points out the stock has declined 20% since the beginning of June. In its latest set of results for the 12 weeks to 23 July, group sales dropped by 1.5%, while UK sales fell by 2.3%. It has already issued three profit warnings so far this year.

"The past few years have seen the disappearance of a significant portion of the company's competition, so if it survives through until the upturn comes (whenever that is), it will have a dominant market position. However, that's a big 'if'," warns Grech.

Think big

There is plenty of choice when it comes to blue-chip bargains, with the likes of Tesco, ARM Holdings, Unilever and BSkyB worth a look.

McCudden points out that it may be worth overcoming any hesitation with banking stocks and he also rates ARM and Tesco, as well as Sainsbury's and Vodafone. "National Grid and Scottish and Southern Energy are high yielding and should weather the storm," he adds.

Grech likes InterContinental Hotel Group, which has lost 20% of its value since the start of the year and is now appearing relatively attractive, with a fairly decent yield.

"We believe that the long-term rebranding programme of the US Crowne Plaza business will pave way to further bottom line growth since a similar revamp of the Holiday Inn division gave the firm a healthy boost coming out of the 2008-9 recession," he says.

Successful bargain hunting in the current climate will be down to a healthy balance of timing, courage and good old-fashioned homework. As Jackson neatly sums up: "Fortune favours the selective, not simply the brave."

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