Shares digital

Any port in a storm? Not if you know how to spot a buying opportunity. Where others rush out of falling markets Peter Webb dives for pearls

There is nothing like market turmoil to stir me from my usual torpor. Always ringing in my mind are the dulcet tones of Warren Buffett. ‘Be greedy when others are fearful and fearful when others are greedy’. I’d definitely say we are in the ‘others are fearful’ stage and so my investing antennae are alert at the moment and my activity is increasing. While my chirpy outlook may sound unusual, when prices start falling on the markets buying companies gets cheaper. Like my favourite pudding on sale in my local supermarket, if something gets cheaper I am more likely to buy it. Currently the market is looking like its stocking up with Banoffee Pie.

I’m never sure I will ever catch the bottom of a market but my focus isn’t really on being that clever, I just prefer to allocate available capital carefully where I can get a reasonable chance of a good return at a reasonable risk. Falling prices mean increasing yields and better returns and therefore I enjoy hunting for companies with good dividends. If all your potential gains are tied up in capital gains you are much more likely to get sucked in by market turmoil, and that is another reason to look for demonstrable returns. We all know it is impossible for a company to be worth more than it can throw off in cash in its lifetime, and by choosing companies with good and consistent dividend yields you can help ‘underwrite’ your investment return.

Not all stocks are as volatile as the main index and if you look at some small caps, some of the holdings are so concentrated and lacking liquidity that the emotion of these surges and falls can be pretty much omitted. It feels a bit like tying up your capital and closing the market for a few years because you really need the underlying business to perform to deliver a good return.

Opportunity knocks

Haynes Publishing (HYNS) is a company that attracted my attention and money a short while ago. At less than £25 million it is quite a small cap stock. You could hypothesise that there is a lot more risk with small cap stocks, and I would agree, but not necessarily if it is a niche business. Haynes Publishing is the worldwide market leader in the production and sale of automotive and motorcycle repair manuals. Every Haynes manual is based on a complete vehicle strip-down and rebuild in the company’s workshops. Haynes manuals are must-haves for enthusiasts, a British institution – and apparently a US institution as well! US profits of £7.4 million dwarf UK and European profits of £1.3 million. This is unusual for a UK company, especially a niche operation.

Haynes hit a rough path around the turn of the millennium but the business and the outlook appear to be pretty stable now. Over the past ten years the business has continued to move forward in terms of turnover and profitability, albeit slowly, but the share price has pretty much remained static over this period. It has also tried to expand into other areas but failed and had to exit these businesses at a loss. If you look at the headline figures you could easily misinterpret them as a business in trouble. But underneath these topline figures is a pretty solid business, therein lies the opportunity.

My ideal criterion for purchasing requires a company to have not only a stable and market-leading business but also a strong balance sheet, reasonable yield and trade at the right price. The lack of progress in the share price has left Haynes standing at an undemanding PE of less than ten. This is coupled with a well-covered dividend yield of nearly 5%, so the price looks acceptable. Furthermore, the company has no net debt and if you dig around the balance sheet you will find that the current ratio and quick ratio are very favourable. With a very strong balance sheet, even if the company hits rough times again, there is a very strong chance that this wouldn’t be a problem for it as it has the strength to overcome these issues.

An example to follow

Haynes appears to hold very little downside risk. While its growth prospects are not as exciting as other shares, it is certainly inexpensive. With a profitable niche to exploit, it looks very appealing at the current price. The icing on the cake is that there is also institutional interest as well.

Haynes is a good example of something that qualifies as a value purchase. But in a market that is showing general declines there are probably many other shares out there that have the right fundamentals but not the right price. With the markets having a summer sale it’s worth refocusing your efforts to find shares that are exhibiting favourable characteristics, as it is much more likely now that they are going to reach the right price.