Undervalued / Oversold

hallmark

Just for fun and since this board generally doesn't include recommendations, if you had to pick something you think is currently "cheap", or at least, likely to recover & beyond, what would it be?

I'll nominate

This, which yields a decent dividend too: https://www.youinvest.co.uk/market-research/LSE:IPRP

LS20, which has been staggeringly bad and historically does well after such periods

And Amazon, which might well fall further but I just think it's so many good businesses, most especially AWS.

I'm bearish on the whole but dripping into various things regardless

biscan25

Just about any bonds.
Gilts were definitely oversold. Corporate spreads are more justifiable but still overreacted a bit IMO.

Basically anything but equity.

NedS

I have cash on the sidelines waiting to invest (I know, I'm a market timer). I was waiting for the S&P to drop below 3500 (my best guess is it may go to 3200) before starting to feed that cash into a diversified global equity tracker, but the dollar strength has meant that global equities just haven't dropped in Stirling terms to the same degree and there's less of a dip to buy.

So what to do instead? The pound is weak, so I'm considering UK equity instead, which has dropped significantly. I'm looking at UK small/mid cap funds with high quality holdings that have traditionally performed similar to global equity, but have fallen / are looking cheap/oversold (things like AUSC and THRG). But not yet - I think we have further to fall and the UK equity market will continue to be dragged down by any further US falls, and we've not even entered recession yet. They are typically down 50% from their highs a year ago, not sure where they will land, but I'm fairly confident there will be opportunities in the next 12 months to buy them cheaper than they are now.

More recently, in my income portfolio I've topped up holdings in floating rate, asset backed senior debt and renewables during the sell-off. Credit spreads widen significantly in a crisis, and floating rate debt means income increases as interest rates continue to rise. The increased default risk can be mitigated by holding a high quality portfolio of asset backed senior debt. I also think the renewables sector (solar, battery and wind funds) sold off too aggressively so topped up some holdings last week at significant discounts to NAV. These are extremely cash generative at the moment with higher forward power prices and inflation being higher (inflation linked incomes), not to mention the scrapping of the corporation tax rise all offsetting the risks to NAV. Many are paying dividends of 5-7% that are extremely well covered by income. Any regulatory risk is likely to take years to materialise and unlikely to affect current investments which are contractually bound by long term CfD's or PPAs.

mark_cycling00

Am I correct in thinking that the sell-off of "income" stocks is due to the comparative risk compared to gilts that pay now pay nearly similar rates - 4% ish?

So if you take GoreStreet (battery) that paid about 5% dividends, then the market now expect 6+% to compensate for the risk compared to very safe gilts? so the price drops to achieve that rate? 

thanks

Linton

mark_cycling00 said:

Am I correct in thinking that the sell-off of "income" stocks is due to the comparative risk compared to gilts that pay now pay nearly similar rates - 4% ish?

So if you take GoreStreet (battery) that paid about 5% dividends, then the market now expect 6+% to compensate for the risk compared to very safe gilts? so the price drops to achieve that rate? 

thanks

Yes, in my view that is the basic mechanism.  Much the same as with bonds issued when interest rates were lower.

biscan25

mark_cycling00 said:

Am I correct in thinking that the sell-off of "income" stocks is due to the comparative risk compared to gilts that pay now pay nearly similar rates - 4% ish?

So if you take GoreStreet (battery) that paid about 5% dividends, then the market now expect 6+% to compensate for the risk compared to very safe gilts? so the price drops to achieve that rate? 

thanks

Yes, you can even think of an equity like a bond, with the present value of a dividend stream, discounted at the risk free rate +some margin to give the stock price. So as the risk free rate goes up, value of all assets that pay out goes down.

jimjames

My usual go-to share, sitting on hefty discount at the moment, PIN

NedS

Linton said:

mark_cycling00 said:

Am I correct in thinking that the sell-off of "income" stocks is due to the comparative risk compared to gilts that pay now pay nearly similar rates - 4% ish?

So if you take GoreStreet (battery) that paid about 5% dividends, then the market now expect 6+% to compensate for the risk compared to very safe gilts? so the price drops to achieve that rate? 

thanks

Yes, in my view that is the basic mechanism.  Much the same as with bonds issued when interest rates were lower.

Gore Street is on a 6.2% dividend yield at today's SP, or 6.8% if you managed to buy the dip last week.

biscan25 said:

mark_cycling00 said:

Am I correct in thinking that the sell-off of "income" stocks is due to the comparative risk compared to gilts that pay now pay nearly similar rates - 4% ish?

So if you take GoreStreet (battery) that paid about 5% dividends, then the market now expect 6+% to compensate for the risk compared to very safe gilts? so the price drops to achieve that rate? 

thanks

Yes, you can even think of an equity like a bond, with the present value of a dividend stream, discounted at the risk free rate +some margin to give the stock price. So as the risk free rate goes up, value of all assets that pay out goes down.

Yes, that is the basic principle, although there are also a number of other competing factors driving the NAV (unlike the simplistic relationship on a bond). For example, increasing inflation will increase the NAV as much of the income streams are inflation linked, and if the fund now expects to receive more income in the future than previously predicted, the NAV increases (as do dividend payments). Then there's the scrapping of the Corporation Tax rise which means the fund gets to keep more of it's income stream, which increases it's NAV (and future dividend payments). Same thing with forward pricing of electricity - if production is not already tied into CfD's, these funds typically sell power on PPAs based on predicted energy costs for the next 1-3 years. As energy costs rise, so do income streams which increases it's NAV (and future dividend payments). The battery funds are a little bit more complicated as they don't simply store then sell electricity to the grid. They can do other fancy stuff like frequency and load balancing and can trade short term price fluctuations in the electricity markets.
At the moment there are more positive drivers (high inflation, high energy costs, lower taxation) than there are negative drivers (increasing interest rates), which has driven the 25-30% gains in NAV over the last year or so. At some point NAVs may start to unwind (lower energy prices and lower inflation), but that is only to be expected given such strong growth over the last year. For now though, they are delivering as expected (5-7% dividend with long term growth potential) and the sell off provided an opportunity to reinvest dividends at a significant discount, further enhancing returns.