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Anatomy of a Contrarian Value Investment
The market is caught in a halfway house between a correction and a crash. This can’t stop us buying totally and it should not stop us watching and waiting.
Value investing is about buying when shares are cheap, often when no one wants to buy at all. At some point a share will get so cheap it’s safe to buy, crash or no crash.
There are two now, writ large. They are Shell and Volkswagen.
We have Shell in the portfolio but VW won’t fit as it is in euros and most of my readers would find it awkward to buy. I just bought some and will buy more if VW continues to fall.
Shell is cheap because oil is out of fashion and its price has halved. Shell is paying a huge dividend which is likely to get cut in due course if oil doesn’t rise.
Oil will rise, it is just a case of when. It is also a question of when will Shell hit its bottom. I will buy some more every pound or two Shell falls from here. Oil will recover and profits will rise. Oil is a perfect inflation hedge to boot. Shell isn’t going away. Shell is now a long term gift to long term investors, it is in effect a deposit account paying 8% interest or more. It might pay less in the short term but in the long run it is likely to pay more for those buying cheap now.
Investing in opportunities like this is just a matter of not getting too excited at the beginning and diving in too heavily early on. I dip my toe in the water and buy chunks when it gets cheaper.
Buy Now - £104.28/year (inc VAT)
Meanwhile VW has been caught fixing its emissions by the American regulators. VW appears to have gone to great lengths to cheat the tests, including instructing the engine-in software to know when it is on a rolling road and to change its engine’s behavior accordingly.
It could get fined $18bn dollars. Its share price has collapsed. It will likely get fined $3bn, a lot less than the headline that knocked about 15 billion euros off the company’s value. VW is now on a 4-5 P/E and has a dividend of 4%. This will all get garbled by the fine, but in a couple of years VW will still be VW and it will likely be making Beetles etc and be around 150 euros a share rather than the 106 euro price it is today, after a fall from 160. Earlier this year it was 250 euros a share and who knows, the fall might have been because people knew ‘it’ was about to hit the fan.
These two companies have great potential for the long term. The investor will stake them out and watch them intently for opportunities to buy more at a better price.
This is how aggressive contrarian value investing works.
Buy Now - £104.28/year (inc VAT)
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