Investing is easy right now.
This was a point made by one of our experts at last month’s Roundtable.
It seems an odd thing to say when markets are going through the floor, but I agree with him. When everything is going up, it’s harder to tell a good opportunity from a one-week wonder. Dividend yields are low, p/es are high – there’s not much obvious value to get excited about.
But now it’s a lot easier. For a start, there are so many sectors that you can just scrub off the investment list, which makes things a lot more manageable. Let’s have a look at some of them…
Sectors to ignore
First off, forget the banks. As I pointed out yesterday (The one critical reason to avoid the banking sector), the government is way too entrenched there for investors to have any sort of certainty. If you’re a gambler, you can feel free to dip in and out of the sector any time you want, but don’t kid yourself that you’re investing. You’d have more certainty punting at Cheltenham – at least you know the rules of the race aren’t going to change when the horses are halfway round the track.
Next – retailers. British consumers have proven remarkably sturdy in the face of the credit crunch, but they are showing signs of wilting now. We shouldn’t be too surprised by this – US consumers were well into their downturn before US sales really started to fall off a cliff.
The British Retail Consortium reported that high street sales in February were down 1.8% on a like-for-like basis compared to last year. The news came after a surprisingly strong showing in January. Now, February was the month when all that snow hit, so that no doubt had an impact. But February’s also the month when reality kicks in as credit card bills rack up the impact of Christmas spending and the January sales.
If you delve deeper into the figures, then the picture is much worse. Non-food sales fell by 5.3% on last year. The overall figure was dragged up by a 4.3% rise in food sales. Furniture sales were particularly weak, and have now fallen in 18 of the past 19 months, reports The Telegraph. It all points to more trouble ahead for the high street. So that’s another sector to keep steering clear of.
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But what about housebuilders? Yesterday, shares in Bovis jumped 7% after results were better than expected. But that just shows how low expectations were – the company made a pre-tax loss of £78.7m last year, compared to a profit of £123.6m in 2007.
The builder has taken steps to prop up its business. It slashed its workforce from 1,039 staff to 441. Meanwhile, it said the market had improved a little – private reservations are up 22% on last year, at 271, although this is mainly down to more “assertive pricing” (a euphemism for “we’ve slashed prices”), and “not reflective of overall conditions.”
In other words, the company has plunged into a loss, it’s cut its workforce by more than half, and it’s having to cut the prices of its products to drive sales, but otherwise, everything’s fine. Doesn’t sound like a great deal to me. We may start to get more visibility on which builders can survive the downturn and which ones are facing bankruptcy. But I still wouldn’t be thinking of dipping a toe in the sector. House prices have a long way to fall yet, as my colleague Dominic Frisby will be discussing in tomorrow’s Money Morning.
What should you be buying?
So what should you be considering buying? That’s a tougher call – but only slightly. Defensives are still the stocks to go for just now. The key thing for the moment is still survival. If a stock is likely to still be here in five years’ time, that’s a pretty good sign.
One bankruptcy indicator that our experts James Ferguson and Tim Price both like is the Altman Z-Score. You can also read more about the crucial aspects of the balance sheet you should review before investing in a stock.
With share prices continuing to fall, yields just keep rising. While there’s every chance that share prices will keep falling (our own James Ferguson has pointed out to readers of his Model Investor investment service that the FTSE 100 could easily fall below 3,000), it’s hard to deny that there are some attractive-looking stocks out there, though each comes with its own risks.
I’m generally a fan of big pharma – the likes of Glaxo and Astra aren’t going to go bust, and both yield well above 5%. The main risk here is that they fall into the classic trap for big drug companies, and decide to embark on a value-destroying merger.
Then there’s big oil. The oil price seems to have stabilised for the time being. There’s no guarantee that this will continue, but BP certainly seems determined to maintain its dividend for as long as it can. And on a yield of more than 7%, it looks worth taking the risk.
My colleague David Stevenson also recently pointed out more specific stocks that can actually benefit from the recession. Read his tips here: Seven companies that will prosper in the recession.
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