Three factors to consider when selecting cheap stocks

DNR Capital has shared three tips for investors looking for cheap opportunities in blue-chip stocks presented by the COVID-19 sell-off.

Stockmarkets have plummeted in recent weeks with the ASX 200 falling around 16% since the start of the year, leading to a fears of a recession which would be the first in Australia since 1990.

This presented opportunities for investors to pick up blue-chip names at low prices, particularly in areas such as technology and travel.

Jamie Nicol, chief investment officer at DNR Capital, said the firm, which runs the Australian Equities High Conviction and Australian Emerging Companies fund, was considering the following factors when it came to stock selection:

• Thinking through where there will be long-term changes to behaviour which might impact the value of a company e.g. Domino’s Pizza Enterprises (DMP) is benefiting from an increase in downloads of their apps in Europe and increased usage. Once the app is downloaded it can drive ongoing usage over time.
• Identify quality companies which have been sold off in the current environment yet the long-term health of the business looks strong e.g. Ramsay Health Care (RHC) owns a strong portfolio of hospitals and is down 30% from its highs. In the short-term there will be a decline in elective surgeries (partially offset by a pick-up in patients transferred from public hospitals) but in the long run little has changed—they own high performing hospitals which will benefit from an ageing population.
• Using the volatility to improve the quality characteristics of the portfolio—good companies are usually the first to be bought into a recovery.

“The market sell-off has been very sharp and indiscriminate and we see this as providing a range of opportunities to buy good businesses at very attractive long-term valuations,” Nicol said.

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“While the impact on short-term company earnings has the potential to be material, the overall value of a company is not significantly impacted by the outlook for earnings over the next six months, but rather its future long-term earnings capacity. When the market is caught in the moment of uncertainty, the focus of market participants can shrink rapidly and we think it is a mistake to become too short-term in your thinking at this point.”

The DNR Australian Equities High Conviction fund has lost 8.9% over one year to 16 March, 2020, according to FE Analytics, versus losses of 15.6% by the ASX 200.

Performance of DNR Australian Equities High Conviction fund v ASX 200 over one year to 16 March 2020