Being able to override greed and fear in the face of market volatility is mainly psychological – and a large part of successful investing.
Consider the end of 2018 - it was the worst December on record since the Great Depression, but in the months following, the Australian and US stock markets rebounded strongly. Unfortunately for many investors, they reacted to the price action and more money left US mutual funds in December than at any time since the Global Financial Crisis. We can see why the average mutual fund investor underperforms the S&P500 by approximately three percent annually and considering the impact that compounding has over the long term, this is a staggering number.
So, is the market about to roll over? No one can be sure.
What we do know is that we’re late in the economic cycle and there are plenty of risks to worry about. Nevertheless, overall equity multiples look reasonable and compared to long term government bonds they look attractive.
Consumer sentiment is likely to rebound post the election, private equity is flush with cash, tax cuts are happening, interest rates have been reduced, high iron-ore prices will strengthen the budget and the lending criteria for banks has been lowered by APRA. Compared to the situation three to six months ago, things are looking good.
There are a range of attractively priced stocks available that are predicted to deliver positive returns over the medium term. Some of these companies are small, so they fly under the radar of most analysts.
A few companies trading on undemanding multiples are:
ZEN: Zenith Energy designs, installs, and manages off-grid power generation plants for hybrid energy solutions. The company has won a number of significant projects over the last year. The business provides an attractive alternative to mining companies, where mining companies contract to buy power in a subscription-like agreement. In mining, you literally make sure you pay for your power before you pay for anything else - if you want to keep the lights on. The average term of ZEN’s power purchase contracts is 7.7 years. The Chairman is a significant shareholder and the company recently provided FY20 EBITDA guidance where they forecast 38% growth over the previous year. Trading on just 4.9X EV/EBITDA with a solid pipeline of potential work, the company is well-placed to continue to grow after a recent capital raising strengthened the balance sheet.
ANG: Austin Engineering supplies customised equipment to large global mining clients, mining contractors and original equipment manufacturers. The company has recently strengthened their balance sheet after selling a number of non-core assets. The company is very well-positioned to benefit from the replacement cycle at a time when mining companies are enjoying elevated commodity prices. The company trades on just 6X EV/EBITDA.
QMS: QMS Media is an outdoor advertising media company which controls a portfolio of digital billboards, digital sports venue screens and, subject to completion, a 40% interest in NZ Mediaworks. The sports business is a leading player in in-game sports advertising and is at the leading edge of monetising global sport brands through venue technology. QMS’ leading technology in sports allows the streaming of different advertisements on its digital screens into different markets, significantly enhancing the revenue potential for sporting venues that have a global audience. The broader digital billboards business has benefitted from strong demand for outdoor advertising as customers become attuned to the improved customer engagement with digital screens at a time when the traditional media landscape has become disrupted by online alternatives, eg. Facebook, Google, Instagram, etc. The CEO of QMS also owns a substantial stake in the company and recent corporate transactions have been done at multiples nearly twice that at which QMS trades. QMS trades on c6.6X consensus FY19 EV/EBITDA multiple.