Market Musings 240922: Start To Hunt For Deeply Discounted Quality

25th Sep '22 by Edmund Shing

12 comments 4825 reads

Market Musings 240922:

Start to hunt for deeply discounted quality

Where has the market been over-aggressive in its indiscriminate sell-off?

Summary:

Is a sense of financial market panic in the air?
Contrarian value to be found as the proverbial baby is thrown out with the bathwater
Be choosy, look for discounted quality growth companies
Value also in certain discounted Real Estate Investment Trusts for income seekers
Don’t be in a rush, markets are unlikely to rebound in a straight line.
Stocks that look good starting points for more research

Smells like panic is in the air

Another week, and yet more pain for long-suffering stock, credit and bond market investors.

In fact, some of the greatest pain was reserved not for the stock market, but rarely enough, the sovereign bond market.

In the wake of the ongoing strength of the US dollar, combined with the nervous bond market reaction to new UK Chancellor of the Exchequer Kwasi Kwarteng’s tax-cutting mini-budget, UK gilts suffered a real shellacking. The £VGOV Vanguard UK Gilt ETF is classified as a 4 out of 7 risk, and yet it has lost 28% over 2022 to date, far worse than e.g. the FTSE 100 stock index.

The VGOV UK Gilt ETF -28% over 2022 (so far)

Source: tradingview.com

Frankly, this week smelt a lot like investor panic, with even formerly resistant segments of the stock market such as the oil & gas sector taking as much of a bath as elsewhere.

Secondly, the US equity put/call ratio hit its highest level since March 2020 (the depths of the COVID lockdown-triggered market crash). Investors buy calls when they are bullish to get upside to the stock market. But conversely, they buy puts when they want to protect their stock portfolios or position for a falling stock market.

A high put/call ratio then indicates that investors are very bearish on the stock market, as they are buying many more puts than calls..

Most bearish US equity put/call ratio since March 2020

Source: tradingview.com

So markets are rapidly integrating the current/forthcoming recessions in Europe and elsewhere, as higher interest rates and high energy prices take their toll on economic growth.

Institutional investors have been heavy sellers of European stocks for pretty much all of 2022,

Investors have been heavy sellers of EU…

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Trader Jack

25th Sep '22

Hi Edmund. I always enjoy your posts. I‘m interested in your thoughts on Tritax EuroBox (LON:EBOX) - the chart is a shocker - due I think partly due to the lack of sentiment in REIT’s but also due to the high gearing, lack of divi cover and refinancing that will be due in 2026. I hold & heavily under water. Would be interested to know what others think too!

Zipmanpeter

Always very good articles. Thanks. Absolutely agree on the likelihood of US takeover of UK small caps.

BnB

In addition, those looking for potentially undervalued small-cap quality growth stocks might find the following tweet thread from @QCompounding interesting, as it highlights 20 undervalued Quality Small-Cap stocks

Interesting list. I hold as many as 7 of them! All four UK names plus InMode, Pubmatic and MIPS.

bryaz

Informative as ever

Vince55

Thanks, informative, but you need to look outside the U.K. and also Europe- they are facing immense secular and long-term economic headwinds with overleverage, high inflation, and energy dependence. The economic policies of the Truss govt and the EU project aren't encouraging.

aflash

26th Sep '22

Compare EBOX to BBOX (Tritax Big Box ).

BBOX traded at a premium for over 10 years.

Since August it has been at a discount which now reaches 41%.

I have just started a small position but it may well get worse before it gets better.

EBOX has a 43% discount.

BBOX has more liquidity, it is 5 times as large and most metrics are superior.

The important ones are: Free cash flow, gearing and interest cover.

Returns on capital and margins have been better although that may change.

Three Screens I respect for BBOX to one for EBOX.

EBOX has slightly cheaper Price to Book.

From a chart perspective they have followed similar trajectories.

Dead Cross in the spring.

BBOX had a brief bounce in July and another earlier this month.

EBOX only went sideways.

No sign of a bottom on either.

RSI well below 30, so Oversold.

Huge bearish volume.

fred9566

Although currently using a box of tissues per week your assessment was quietly reassuring because I am currently holding POLR, LIO, SOM , SLP, TM17 and GAW- I constantly look at them to confirm to myself that they are good companies and are worth holding on to - your article helps enormously - thank you

bsharman

27th Sep '22

Excellent article thanks. I'm looking at some of the REITs and some such as Land Securities (LON:LAND) are almost back to where they were in the Great Financial Crash! I'd like to hear some more detailed analysis and commentary on this sector. Having said that I have also been buying fund managers such as Liontrust Asset Management (LON:LIO) and selective retail such as £DNLM

Melvyngd

Hi Edmund,

I notice you have stayed clear of mentioning any building companies.

What are your views on the building sector for example Persimmon is currently down over 40% would this type of stock be worth picking up.

best wishes

Bronstein

28th Sep '22

I thought these REITs were the smart choice this year for my ISA as a way to get a good yield without capital destruction much anticipated in bond markets. SO much for that theory. Just wish I was buying now and hadn't done 6 months ago.

Lucky dip

24th Oct '22

only two companies worth keeping: Cerillion and Games workshop

Mark Rorison

27th Nov '22

LON:CAML comes up in this discussion but no comment so assume being flagged as some value play: I wonder how this will be affected and for how long that its Khazakstan operations most likely use Russia for transport, so are they still finding markets say in Asia while the west continues to try to punish Russia?

Market Musings 240922: Start to hunt for deeply discounted quality