As investors, it’s tempting to believe that we need to consider market sentiment when buying and selling shares.
But what if we ignore all the noise — most of which is merely guesswork and opinion — and focus only on the facts? Stock market history suggests that investors who can ignore sentiment and focus on the numbers can often do very well. In this article I’ll look at three companies I believe could be profitable contrarian buys.
The housebuilder question
It’s hard to decide whether to invest in housebuilders without taking a view on the housing market and the economy. But if you remain cautiously optimistic, then Barratt Developments (LSE: BDEV) may be worth a look. Its shares fell 4% after today’s trading update and are down 30% since the Brexit vote.
Barratt said today that it was too soon to judge the impact of the referendum on sales. However, the group expects to report a 20% rise in pre-tax profit to £680m for the year ending 30 June, in line with current forecasts.
Year-end net cash was £590m, up from £186.5m last year. The group’s return on capital employed rose by 3% to 27%.
At 395p, Barratt shares trade at just 1.1 times their book value. A forecast P/E of 7.3 and an expected yield of 7.6% could look very cheap if the market remains stable.
Insider buying at this quality firm
Profits at FTSE 250 IT infrastructure services firm Computacenter (LSE: CCC) have risen by an average of 15% per year since 2010.
This strong track record hasn’t stopped Computacenter’s shares from falling 14% so far this year. Investors may be concerned about the outlook for the group’s operations in France and Germany, but chairman Greg Lock doesn’t seem worried. He and his wife have spent £358,823 on Computacenter shares since 3 June, buying at about 837p and then at 780p.
Trading was stable during the first quarter and I’d imagine that the weaker pound should increase the sterling value of the firm’s euro revenues.
Another attraction is Computacenter’s £102.5m net cash balance, which represents 83p per share, or around 11% of the firm’s market cap. Stripping out this net cash from the share price gives Computacenter a 2016 forecast P/E of just 12.3. There’s also a forecast dividend yield of 3.1%.
Computacenter looks good value to me.
Are postal profits safe?
Royal Mail (LSE: RMG) shares are now down by nearly 10% from their 52-week high of 549p. This decline hasn’t been triggered by any bad news, only by weaker sentiment.
For investors looking for a reliable long-term income, I believe this could be a buying opportunity. Royal Mail now trades on a trailing P/E of 12.2 with a dividend yield of 4.4%.
The group’s finances remain strong. Net debt was just £224m at the end of last year. Royal Mail’s book value of 445p per share provides substantial asset-backing for the 500p share price.
Although Royal Mail is often criticised for being outdated and inefficient, this is a business that’s been operating successfully for 500 years. In my opinion, strong growth in home parcel delivery is a big opportunity for Royal Mail.
I continue to rate the shares as a strong income buy.