There was 25% off my favourite coffee this week. I bought a packet — two, actually. I didn’t think: I’ll hold off, perhaps it’ll be even cheaper next week. However, when a company’s share price comes down, we often um and ah about it, wondering whether we might be able to buy at a still lower price if we wait.
The trouble is, there’s no way of knowing what the lowest price will be. But there’s no need to be too greedy. Buying good companies that are “on sale”, because of some macro worries or business stumble, can be highly rewarding, even if you don’t get the very lowest mark-down in the sale.
Rio Tinto (LSE: RIO), Rolls-Royce (LSE: RR) and Hunting (LSE: HTG) are currently on sale, and have spectacular recovery potential for patient, long-term investors.
Rio Tinto
Mining giant Rio Tinto hasn’t done a lot wrong under chief executive Sam Walsh, who took the reins in 2013. But the industry is cyclical, and the company’s revenue has fallen due to prevailing low metals prices. The shares have been whacked, too. The price reached a post-financial-crisis high of over £46 in 2011; today, you can buy at under £24.
Rio is one of the world’s lowest-cost iron ore producers. By ramping up volumes — as it has been doing — it can partially offset weak prices. Higher-cost producers can’t compete and in time supply will be taken out of the market and prices will rise again.
Rio offers a compensatory 5.9% prospective dividend yield to investors today, who are willing to wait for the cyclical upturn. In fact, earnings declines are expected to bottom out this year, with analysts forecasting low double-digit growth for 2016, putting Rio on a forward P/E of 14 and giving the shares substantial potential upside for the longer term.
Hunting
Turning to another natural resources industry, shareholders of oil companies haven’t had much to sing about over the last year, with the dramatic decline in the price of black gold. The share performance of supermajors, such as Shell and BP, has been disappointing enough, but can’t compare with the wholesale cratering of share prices seen at companies in the oil equipment and services industry.
Hunting has been one of the hardest hit, mainly because most of its peers have some diversification in other industries. Hunting’s shares were trading not far off £9 last summer, but are changing hands for less than £5, as I write.
Earlier this month Hunting reported a 76% decrease in profit from operations in the first five months of the year, and analysts see little improvement through to the end of the year. However, forecasts are brighter for 2016 to the extent that Hunting trades on a price-to-earnings growth (PEG) ratio of just 0.3. With a PEG of 1 indicating fair value, Hunting’s rating implies considerable upside potential for the shares from their current level.
Rolls-Royce
One of Britain’s premier, world-renowned businesses, Rolls-Royce has been in the wars of late. It wasn’t so long ago that investors couldn’t get enough of the aerospace firm’s shares, pushing the price up to over £12. As I’m writing, the shares are trading at a new multi-year low of under £7.40.
Earlier this month, Rolls-Royce issued a third profit warning in just over a year. The company blamed lower oil prices (its marine division does much business with the offshore oil industry) and order issues relating to the transition from Trent 700 jet engines to the new Trent 7000.
Rolls-Royce is a quality business, and, as the company says, there are drivers for “significant revenue growth over the next ten years”. There’s an old stock market adage that profit warnings come in threes and, with Rolls-Royce having put three behind it, now could be the perfect time for patient, long-term investors to catch this “falling knife”.