Throughout my career, one of my guiding principles has been to ‘sell euphoria and buy despair’. With so much of the latter around, I have to ask: is this a once-in-a-decade buying opportunity, or a once-in-a-century meltdown as occurred in the 1930s? It may sound odd, but I’m in both camps. For highly leveraged businesses without the balance sheets to sustain them through the downturn, it’s game over. However, for more prudent firms that didn’t over-extend themselves in the credit boom, the world isn’t going to end tomorrow. I’d describe today’s markets as benign for discerning investors who are prepared to cherry-pick because there are many quality stocks trading at large discounts to their intrinsic worth.
Gamble of the week: Invensys (LSE:ISYS)
The trick, as always, is to separate the wheat from the chaff. Take Invensys, the engineering technology group. It was battle-hardened during the carnage of the dotcom fiasco and nearly went bust in 2002. But it has returned to the FTSE 100 index, and now possesses a solid balance sheet with net cash of £238m as at the end of December.
This didn’t stop the shares being unfairly marked down last Tuesday when it reported mixed trading, saying it faced “difficult and uncertain conditions” in its Controls unit (representing 30% of sales). It has been hit by deteriorating demand from customers such as Bosch. But elsewhere prospects are far more resilient. In total, £1bn of new orders was secured in the three months to December, with the Process Systems unit winning a £127m contract to install control rooms in four reactors at two Chinese nuclear power stations. The rail unit also won a £123m signalling project in Singapore. The City expects 2009 revenues and underlying EPS of £2.3bn and 22p respectively, putting the stock on a forward earnings multiple of less than eight. The wild card is that this low rating could prompt a competitor to launch a predatory offer. The firm should also benefit from sterling’s crash – more than 80% of its turnover is generated overseas. Potential problems include further downside pressure in Controls, tougher conditions in Process, and a £288m pension deficit to keep on eye on, as well as the usual dangers of managing long-term contracts. But overall this is a buy for the more adventurous.
Recommendation: speculative BUY at 164p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments.