The FTSE 100 index is down 3.5% since the high it recorded in early September. Does this spell opportunity for investors?
Betting On A Bounce
Miners and retailers have been hammered in recent weeks. Banks have been holding up relatively well, although high returns on capital invested are not easy to achieve in the banking sector.
In this context, are Lloyds (LSE: LLOY), Glencore (LSE: GLEN) and Morrisons (LSE: MRW) three names to keep on the radar?
The shares of these three companies may beat the market in stable trading conditions, but they’ll struggle to deliver value if risk-off trades prevail, in my view.
October: Upside Or Downside For Stock Investors?
For the record, October has been a decent month for stock traders in recent years following the 13% drop that the FTSE 100 index registered in October 2008.
Do I think another market crash is around the corner? No, I don’t. It’s more likely that the performance of the index will be in line with the one it recorded between 2009 and 2013.
October 2009: the index was essentially flat for the month. October 2010: the index was up roughly 1%. October 2011: the index rose by about 4%. October 2012: the index was essentially flat for the month. October 2013: the index was up more than 4%.
Lloyds: Overvalued, Not The Safest Bet In The Banking Sector
Lloyds stock is significantly overpriced based on the value of its assets and trading multiples, in my view. Last week, the bank announced that it had placed a significant stake in TSB at a full price. Lloyds is not a terrific equity investment and upside is limited because investors must consider that other assets will have to be sold — but at a discount. Lloyds is certainly a less risky investment proposition than Barclays, yet HSBC should offer more stable returns, while Royal Bank of Scotland is a more appealing turnaround story.
Glencore: A Bit Overvalued, The Best Play In The Mining Sector
I am not a big fan of the mining sector right now, but Glencore stands out against rivals. Its stock may look a tad overvalued, but if risk appetite comes back with a vengeance then Glencore will likely outperform Rio Tinto — which is favoured by bullish estimates — and BHP Billiton, whose stock has been hammered in the last month of trading. Anglo American is under pressure but it remains a restructuring play worth keeping on the radar.
Morrisons: Troubled, The Best Play In The Retail Sector?
The valuation of Morrisons is under pressure as the top four food retailers in the UK struggle to cope with difficult trading conditions, but there are reasons to believe that the shares of Morrisons may outperform those of Tesco and Sainsbury’s. Recent market share data made for a good reading. As you know, the problem with retailers is that it is extremely hard to call the bottom of the cycle, yet if the market gets traction they will draw attention from opportunistic traders. Value resides elsewhere, however.