NEWSLETTER
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Value stocks are those that trade at a discount to their intrinsic or book value. Many investors build their strategy around these stocks, including the legendary Warren Buffett.
Value investors seek to buy companies that are trading below their intrinsic value and hold them, sometimes for a long time, until they reach their potential. Over the past century, a value investing strategy has frequently outperformed all major indices.
Because right now?
Well, it’s always easier to find valuable stocks in declining markets. And as we have seen, March was not a great month for several sectors, mainly financial stocks.
The March correction was triggered by a banking crisis in the US, specifically when tech financier Silicon Valley Bank (SVB) was forced to sell bonds at a loss as depositors withdrew their cash.
These bonds had lost value because bond prices and bond yields are inversely related, as we know central banks have been pushing rates up.
But SVB was unique in the concentrated nature of its bond holdings and the lack of diversity in its deposit base. However, the events raised concerns that other banks and financial institutions were sitting on billions in unreleased bond losses.
A few weeks later, we now know that these fears were largely misplaced. Liquidity is strong in this post-GFC world and most banks will hold bonds to maturity; that’s why these bond losses remain unprecedented.
But the downward pressure on shares has created opportunities. Especially since many UK based financial institutions were trading at discounts anyway.
Buffett is among several value investors taking advantage of the opportunities created by a correction. “Bad news is an investor’s best friend. Allows you to buy a slice of America’s future at a discounted price.” He adds that “net buyers” of stocks benefit when the stock market goes down.
where to put my money
I’m focusing on some of the stocks hit the hardest by the March sell-off. I liked financial stocks before the correction, and several are now trading 20% cheaper than they were a month ago.
Among the biggest losers in standard charter. The bank has dropped 22% in a month, 20% more in a year. It is one of the most interesting banks listed in the UK as it naturally focuses on the fast growing markets of Asia and the Middle East.
Standard Chartered currently trades with a price-earnings ratio of 7.5, making it substantially cheaper than its US peers, but among the most expensive banks in the UK. Naturally, there are concerns that interest rates are too high at the moment, and this will translate into higher impairment costs. But the medium-term forecast sees rates fall to more attractive levels: 2-3%. As stocks fall, I bought.
legal and general It is another financial stock that I have reloaded after seeing the downward pressure. It’s down 10% in a month, 13% in a year, but it doesn’t seem guaranteed. Its Solvency II Coverage Ratio increased from 187% to 236% during 2022, and business growth is positive: possibly the most exposed to positive trends in bulk purchase annuities.
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