"You pay a very high price in the stock market for a cheery consensus" – Warren Buffett.
Share markets always overshoot far in both directions.
For example, when a company is doing well its valuation often becomes unreasonably high.
At the other end of the spectrum, prudent value investors do their bidding and make a killing.
Buy low, sell high.
Being patient and waiting for moments to exploit irrationality isn't always easy. It requires a cool and calm temperament, which often comes through self-assuredness, competence and experience.
It's important to keep that in mind when buying blue chip stocks such as Wesfarmers Ltd (ASX: WES), Telstra Corporation Ltd (ASX: TLS) and Coca-Cola Amatil Ltd (ASX: CCL).
Take Wesfarmers, owner of Coles, Bunnings Warehouses and more, and Woolworths Limited (ASX: WOW) as the perfect example.
On the one hand we have Woolworths apparently struggling to deal with the rise of low-cost operators like Aldi and Costco, whereas Wesfarmers shares are trading at a price well above my theoretical, or intrinsic value estimate of their worth ($31.19).
Sure, its products might be a dollar or two cheaper in store, but its profit margins are already thinner than Woolworths. Moreover, further competitive pressure within the supermarkets division could be a cause for a downwards re-rating of Wesfarmers shares.
Telstra has — much like Wesfarmers — been kicking goals for shareholders. Similarly, its share price may have got ahead of itself. More than doubling in price over the past five years, it now trades on a trailing price-earnings ratio of 17x and dividend yield of 4.9%.
In my opinion, whilst it continues to push ahead with its promising Asian growth strategy, Telstra shares appear fully valued at today's prices. Investors should look to pick up shares if/when their price trends back towards $5.00.
Finally, Coca-Cola Amatil has been the focal point of intense debate amongst the value investing community. The bears say consumers are no longer drinking fizzy drinks and turning to healthy options. The bulls say it's only a matter of time before consumers return and Australia's distributor of Coca-Cola and Beam branded products wins over the huge Indonesian fizzy drink market.
Having recently fallen in price to trade around $9.36, I think Coca-Cola Amatil shares are offering OK value for the bears, but excellent value for those bullish on the Indonesian story. Management are targeting a return to profit growth in the 2015 financial year, but by the time they announce the results it might be too late to buy in.
