Many investors nod in agreement with Warren Buffett’s simple and sage advice, such as “be greedy when others are fearful.” Except when it comes to putting those words into practice!
The stumbling block I hear most is: “I like the company, and its share price has fallen a long way, but I think it could fall further.” This isn’t being greedy when others are fearful. It’s the very definition of being fearful!
If you’re confident a company is well-managed, financially strong, and has good long-term growth prospects, if you were thinking of buying it’s shares a week ago, a few weeks ago, or a few months ago, and if those shares are now trading at a material discount, it’s time to be greedy.
Fear in action
Companies in the tourism and travel industries have been hardest hit by fears about the impact of the coronavirus. I’m not surprised by this. We’ve had headline news about cruise ships and hotels in lockdown, and restrictions on travel.
However, I believe cruise giant Carnival (LSE: CCL), flights and holidays firm EasyJet (LSE: EZJ), and InterContinental Hotels Group (LSE: IHG) are well-managed and financially-strong businesses, with good long-term growth prospects.
I’ve rated two of these three FTSE 100 companies ‘buys’ — and, in the case of IHG, a ‘hold’ — in the recent past. With their share prices closing yesterday at large discounts to a week ago and their 52-week highs, I think this is a great opportunity for buyers.
InterContinental Hotels’ share price is down 12% this week, and 23% from its 52-week high. For EasyJet, it’s 26% and 28%. And for Carnival, it’s 20% and 44%. If you’re not going to snap up such stocks at such discounts, when are you going to buy? When everyone’s being greedy and prices are high?
Long-term view
Undoubtedly, CCL, EZJ and IHG face challenges in the near term. It would be no surprise to see their earnings forecasts for 2020 downgraded by City analysts, if the impact of the coronavirus proves more severe than currently envisaged.
I think it’s a fool’s errand to value the businesses on present forecasts. Or to try and second guess where the forecasts might move in the coming months.
I reckon it’s far better for long-term investors to look at the earnings these enterprises have generated over the last few years. And to ask whether — when the impact of the coronavirus recedes — the world’s biggest cruise operator, one of the owners of some of the world’s most well-loved hotel brands, and one of the most popular and forward-thinking budget airlines are capable of growing their earnings over the long term. Personally, I think they are.
At a share price of 2,397p, Carnival trades at 7.1 times recent average annual earnings. InterContinental Hotels, at 4,422p, trades at 19.3 times earnings. And EasyJet, at 1,110p, at 10.7 times. The multiples are spread over quite a range, but are well below the valuations the market has afforded each company in more benign times. As such, I see good value in all three stocks.