STREET DOGS

From Lee Wild at interactive investor:

With shares looking relatively cheap, the investor might feel like a child in a sweet shop.

Without knowing the impact of coronavirus on company profits, accurately valuing stocks is difficult. Stocks may only look cheap on valuation grounds based on historic earnings, not future profits.

Valuations tend to reflect historic norms, but buyers are often less willing to pay, say, 15 times future earnings for a stock, than they might have done previously. We saw this during the credit crunch when great companies could be bought for single-digit price-earnings ratios.

Dividend yields will have been flattered by sharply lower share prices, and some pay-outs may be at risk if profits are hit hard.

Markets have recovered after every stock market crash in history. Unless the capitalist system suffers a fatal blow, they should this time, too, but the timing is unclear.

You will rarely pick the bottom of the market and share prices might keep on falling. Remember the words of economist John Maynard Keynes: “Markets can stay irrational longer than you can stay solvent.”

It’s no coincidence that defensive stocks like supermarkets, utilities and drugs companies are among those that have fallen least in the recent rout. However, it’s likely they will be among the weakest risers when the market does recover.

A lot of good companies have been dragged lower in the chaos, and it is those that will suffer little financial impact from coronavirus that will be most sought-after by bargain hunters. Look for companies with high long-term returns on capital, high profit margins, strong free cash flow, and little or no debt. Also favour strong brands and large market share.