It Could Be Time to Hunt for Bargains
Investor sentiment has deteriorated so quickly this year that it has caught many market participants off guard. Today, one would be hard-pressed to find any positive information for the market.
Every single piece of economic data and corporate report is warning of further pain to come. If a report is upbeat (such as the recent jobs numbers), it is interpreted as being the calm before the storm.
As a contrarian investor, I am inclined to believe market sentiment is now so negative that it is time to be buying. However, I am also well aware the future is completely uncertain. It is perhaps more uncertain than at any point since the financial crisis, so I am not going to make any claims as to whether or not now is the perfect time to buy.
Still, it is becoming increasingly clear the market is far too pessimistic about the outlook for certain companies.
An example of a cheap stock
A great example is Visa Inc. (NYSE:V). Over the past couple of weeks, shares of the company have fallen. Year to date, the stock is off 7.4%.
That is better than the wider market, but even this performance looks overdone considering the companys prospects.
Unlike many other companies, Visa is not overly exposed to the economic environment. It is one of the two main payment networks in the world, with exceptional pricing power. It also takes a percentage of each transaction as payment for its services.
As fees are based on a percentage of each transaction, this means that as inflation lifts prices, the company's earnings should increase at the same to, if not near, the same rate. Even if real economic growth grinds to a halt and total spending stagnates in real terms, the company's earnings will grow in nominal terms (and hold steady in real terms, but that is far better than most other companies).
According to GuruFocus fair value estimate, the stock is now trading at a discount to fair value of around 20%. The only other time it has been this cheap in the past five years was at the peak of the Covid-19 pandemic (although there was a brief period in 2018).
I have highlighted Visa because it is a company I know well that is operating in an industry that is relatively unique. It is one of two major providers (American Express (NYSE:AXP) is also a network provider, but it does not offer the same kind of global reach and has far more exposure to customer borrowing, which could expose it to losses if the economy suddenly falls off a cliff).
The big challenge for investors is finding the companies that are set to either grow or tread water in the current environment. Treading water is probably the best most businesses can hope for if inflation continues to run higher and unchecked and consumer spending power declines.
It might be tempting to try and be more active in the current market environment, picking stocks that have attractive fundamentals and might be able to capitalize on rising commodity prices or falling consumer incomes. However, the uncertainty means it is becoming harder for companies and investors to project earnings growth over the next 24 months.
That is another reason why I think Visa is a good example of a company that has been unfairly punished. It is much easier to predict earnings growth for a business that has a dominant market share than for a company in a sector that is highly competitive or has volatile input costs such as commodities.
Put simply, the good times are over for both investors and companies. But opportunities are emerging, and by focusing on businesses with the strongest fundamentals, investors might be able to pick up some long-term bargains.
This article first appeared on GuruFocus.
