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How to extract value in a very touched Stock Market | Business

Interior of the Madrid Stock Exchange.Pablo Blazquez Dominguez / Getty Images

Identifying undervalued companies is not an easy task these days. The Covid-19 is an earthquake for business accounts and the investment method called value — it tries to identify cheap values based on their future benefits, their cash flow and their debt — is complicated.

The appearance of the expensive or cheap is now pure fantasy, and the art of the analyst is to extract from that environment of great volatility the jewels that are worth investing with a horizon of revaluation in the medium and long term. In the most critical days of the stock market crisis, volatilities have been experienced that are much higher than their historical average, materializing in that the values on the same day rose and fell by 7% with prices moving without any sense.

Since the lows of this crisis, when the Ibex was around 5,800 points, up to the current 7,070, fund managers have already been moving their portfolio in search of more stable, predictable and defensive stocks. Javier Turrado, commercial director of Bankinter Gestión de Activos, explains that in relative terms, value has been behaving considerably worse than growth for several years: “All styles have a place in our portfolios and above all we try to prioritize quality: identify undervalued companies, understand the business, define intrinsic value. Companies that have a good business model, with a management team that is capable of generating consistent results and anticipating changes, and all on the basis of a solid balance sheet with low indebtedness and cash generation ”.

Turrado points out that in recent weeks the bias of the Bankinter Dividendo Europe fund portfolio has changed towards defensive and quality sectors, increasing stable consumption, pharmaceuticals, insurers, electricity. “To highlight some of the main actions of the fund: Reckitt Benckiser, Sanofi, Allianz, Enel. And without forgetting solid values in other more cyclical sectors with companies such as Kering and Air Liquide ”, he indicates.

In this search for good values, banks and telecommunications are not, for the moment, in the equation. In the case of the banking sector, because monetary policy measures abound in their lack of profitability with zero or negative rates, aggravated by a context of lower economic growth. In the telecos, a lot of debt and paralysis of new businesses like 5G.

Gonzalo Sánchez, manager of RV Iberia of Gesconsult, dares to affirm that whoever invests now will come out very well in the long term. This fund manager has carried out two strategies. In the first, with a general fall in the Stock Market, they have invested in regulated securities, in a quasi-monopoly situation, not affected by demand and well managed. Iberdrola, Edp, Cellnex, Vidrala or Viscofan have set their bet together with titles such as Inditex or Amadeus which, “although they are not in that situation, offer an entry opportunity that is seldom available. In the second phase, when the market is more normalized and everything is no longer falling, it is time to enter into good long-term businesses such as Cie Automotive, IAG or eDreams ”, explains Gonzalo.

Beat the index

Interest in investing in index-linked funds may not be the best strategy for these times, as indicated by Diego Jiménez-Albarracín, director of equities at Deutsche Bank, since “good managers can now make a great return on falls, higher than that obtained by following an indicator ”. He believes that the theoretically cheap should be distrusted because from this month and May there will be numerous revisions in the profit forecast. “In the US it is estimated that profits will fall 30% -40%, and if confirmed, prices would already reflect that situation.” For this expert it is key that the volatility falls to levels of 30%, when in the midst of the crisis it has been above 80%. In its options is the European Stock Market and focused on value values compared to growth. Among the electricity companies, Iberdrola, Red Eléctrica or Enel stand out. Also bet on pharmaceuticals as a defensive sector. In Spain he likes Grifols and incorporates Sanofi, Novartis or Roche from outside. And like other experts, and despite its total exposure to tourism, the travel booking firm Amadeus is an interesting option.

Tourism and raw materials are also out of the analysts' focus because they will suffer the Covid-19 break in their accounts. And that the prices have been very punished, but lack visibility in the medium term.

The head of variable income at Renta 4 Gestora, Javier Galán, explains that the cheapest values are those that concentrate the most risk, such as those linked to raw materials or tourism. Companies with long-term growth, little debt and well managed are essential requirements. “You have to look for companies with a business that is resistant to the next recession. Pharmaceutical companies Grifols, Admirall or Rovi are a good option along with stocks such as Coca-Cola Europe, which has corrected a lot and will not be affected, or Viscofan, with a stable business ”. Galán also likes real estate companies Colonial and Merlin Properties, with a reliable income and dividend, and in infrastructure he highlights Ferrovial and Cellnex.

Four bets

Juan Uguet de Resayre, founder and managing partner of Augustus Capital, highlights four highly penalized securities that must reflect the strength of their price balances.

Stain it. “The glass industry is considered strategic, so plants do not have to stop, although their exposure to the most punished markets such as Spain, Italy and the United Kingdom will undoubtedly affect the results of the year 2020. It is one of the best companies Spanish industrials and now trading at a very reasonable valuation ”.

Amadeus. “It has fallen a lot. Although it is an investment with some risk due to its exposure to the travel and leisure sector, looking to 2021 it is difficult to find an entry point as attractive as it is today. It is the global leader in a market with just three players and huge barriers to entry. ”

Dominion. “Company that operates in a sector in structural growth (industry 4.0). Its excellent management allows them to reach a conversion ratio of 75% of operating profit in cash and ended 2019 with a net cash position of 113 million. ”

Merlin Properties. “It is a socimi with first-rate assets and an excellent management team. The high debt, similar to the rest of the sector, has a not very demanding payment schedule (2022), so you can meet them without difficulty. Dividend yield of 7% ”.

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