Meanwhile, the sometimes indiscriminate write down of share prices will tend to uncover some anomalies, particularly in those industries which, for example, are unlikely to be affected by the credit crunch.
Enter the return of the value and growth investor.
The definitions are many and varied, but as a rule it is generally agreed that, for growth stocks, earnings rates are consistently above average. Value stocks, on the other hand, are ones which investors like to think of as “bargains”, where for whatever reason the current share price does not adequately reflect the worth of the business, or indeed its future prospects.
Pure capital growth stocks tend to be found towards the smaller end of the spectrum and are typified by companies which, assuming they are in profit, will be reinvesting this extra capital in an effort to grow the business further. Growth stocks are very much prone to the vagaries of market expectations, as, in particular, information technology and healthcare stocks have often found. Most of them will tend to be on higher earnings multiples and, not surprisingly, continued year on year growth will therefore be expected. Analysts’ forecasts therefore need to be carefully managed, in order to prevent a rout on the shares in the event of a disappointing trading statement or set of numbers, let alone a profits warning.
On the other hand, value stocks tend to have lower expectations placed upon them by the market. They are characterised by lower earnings multiples, and therefore relatively lower share prices and can often be found to be amongst the higher yielding stocks, or income shares. On the whole, these tend to be well established, stable and cash generative companies who should not have difficulty in maintaining future dividends.
There are additional complications when stocks exhibit qualities of both growth and income, although this is of less concern to individual investors than to the funds which have firmly set out their stall in one camp or the other. The utility sector, as mentioned above, is one where the traditional boundaries of growth and income are becoming blurred. Furthermore, more risk averse investors have tended towards these slightly safer havens after the bear market at the turn of the century, (and to some extent within recent weeks) and this added buying pressure has provided further upward impetus on share prices.
These are, of course, very general summaries - there are a whole host of factors which investors need to be taking into account, especially when investing at stock level, such as the likelihood of strength in future earnings and just which factors differentiate that company from its competitors.
In addition, there is a whole host of fundamental data which investors will consider when comparing similar stocks. These include, inter alia, the price/earnings ratio, the dividend yield, the return on capital employed, and the gearing. Additionally comes the appetite for acquisitions (or even the likelihood of being acquired should the company have reached saturation in its market or, alternatively, should the company find itself in current difficulty).
Space precludes examining each of the fundamentals, but there are a number of killer questions which can separate the successful company from the also-ran.
For example, what is the company’s unique selling point? Is there sufficient breadth and depth of management experience? Is the company diversified, both geographically and in the services or products in which it deals, in order to be able to withstand different parts of the economic cycle? Are its profit margins comfortable, or under increasingly severe pressure? Can its business be complemented by the ubiquitous use of the internet?
With every market correction come opportunities, and already the braver investors are scrutinising where these might currently be found.
Richard J Hunter
Head of UK Equities
Hargreaves Lansdown Stockbrokers