Corrections such as the markets experienced in October are never nice but they are part and parcel of live markets and have to be accepted and taken advantage of. When prices are falling, sentiment turns negative and human nature prevents most from buying. Even for professional investors it is not easy buying when in all likelihood the stock will be down further the next day, but that it is exactly what we do. It is pleasing to write this following a big lift in US Markets following their mid- term elections.
When good companies are down 20 plus per cent on general market sentiment then they are on our buy radar. We know that we will not pick the exact bottom, but we are buying well. A recent example of this is a company called Reliance Worldwide which created a plumbing product that is revolutionising the plumbing industry. In very simplistic terms, it invented, patented and now manufactures a ‘push to connect’ product for pipes (called “Sharkbite”), which enables plumbing without the need for welding. The big advantage – labour hours and costs are reduced dramatically and is applicable to the DIY and professional markets. Reliance has experienced tremendous growth here in Australia and is now rolling out into the US and recently acquired a large plumbing distribution business in Europe at a fair price. I am sure this distribution business will be used to escalate the roll-out of Sharkbite.
Shares pulled back from $6.50 to $5 and we started buying only to watch them briefly hit $4.60. It was only for a very short time and we expect them to continue rise over time to their previous highs. It is a good example of buying well, albeit not at the bottom.
Another example of buying a large quality industrial company after a sizable share price pullback is Pact Group, which is a packaging company with operations here and throughout Asia. Pact’s share price had fallen from $6 to $3.50 after a earnings miss predominantly caused by a rise in the resin costs used in packaging. These costs are ultimately passed on, however there is a timing issue and we believe the market over reacted in the sell down. Importantly, Pact chairman and major shareholder is Raphael Geminder of the Pratt Visy dynasty, who knows a thing or two about the packaging industry.
The well publicised practices of the banks and the wobbles in the residential property markets exacerbating the negative sentiment saw the prices of banks fall to a point where the grossed-up dividend yields were approaching circa 9 per cent. Updates from a number of the banks reaffirmed their dividends, and more importantly to us that their excess capital was better than what the market was anticipating. The only real risk to their business models is a very serious fall in the property prices across Australia. On balance, we don’t see a property crash ( over 30% )and they remain some of the strongest banks in the world operating in an oligopoly and offering an oversized yield.
In all likelihood the recent volatility will continue, and regardless of the short-term outcome, markets will always experience corrections. They are part and parcel of investing and are a reminder to stick with defined strategies.
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