In our previous report on bargain hunting we identified SAB Miller, Ryanair, Merlin and the AA as being of interest. The idea was to find quality stocks that should retain and grow their value over the long-term. Given the ongoing equity market weakness we have had another crack at finding four interesting stocks this week.
The term “bargain hunting” in this report is somewhat tongue in cheek as the main focus is on finding high quality companies. Low P/E stocks don’t necessarily do well over the long-term if the business quality is poor.
We would also caution that in looking for new stocks these will inevitably be companies we are less familiar with. As such there is scope for misjudging the business models and the company risks.
In this exercise we have avoided sectors that are coming under pressure and instead focused on areas that are seeing positive momentum.
Hunting for new bargain ideas
Our objective is to find quality companies where quality means a resilient business with attractive long-term prospects. An additional criterion is that the companies that are found shouldn’t be excessively expensive.
Valuation can be described in terms of the near-term metrics (P/E etc) and the potential for a business. As we stated in our last bargain hunting report there is no need to be clever in market sell-offs by going for “second-line” stocks.
We are therefore focusing on the FTSE 100 as this tends to feature companies that have been around for a long-time. Investment Trusts can be attractive as the discount to NAV increases in a downturn and the portfolios are diversified.
The key drivers for a company are firstly the sector it is in and secondly the underlying business franchise. ARM Holdings, for example, has performed well due to sector characteristics and its underlying franchise in low power chips.
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