Share prices can be affected for a variety of reasons including changes to profit guidance, management changes and general market sentiment. Markets often over-react when company announcements are made and it is these times when investors may have the opportunity to take advantage of the market's irrational behaviour.
Over the last week, G8 Education Ltd (ASX: GEM), FlexiGroup Limited (ASX: FXL) and SEEK Limited (ASX: SEK) shares have been sold off heavily for different reasons. Investors may be thinking if now is a good time to buy, so here is a quick summary of each company:
G8 Education Ltd
G8 Education is the largest listed provider of childcare services in Australia. The company has not released any negative news recently but the stock has fallen more than 10% over the past eight trading sessions and more than 40% since reaching its all-time high in September 2014.
As the chart below shows, G8 Education has grown rapidly over the last five years with a compounded annual growth rate of 93% in underlying net profit after taxes from 2010 to 2014.
Source: Company reports
More recently, there has been a lot of negative commentary about G8's 'roll up' business model and the ability for the company to maintain the current growth rate while still making acquisitions at reasonable prices.
I believe the sell-off has been overdone and I expect G8 education to continue to increase the number of childcare places it offers. The government has recently announced changes to the childcare system that should see the demand for childcare services continue to grow substantially in the short to medium term.
G8 Education looks attractive at the current share price and is offering a dividend yield of over 7% that should provide support from further share price falls.
FlexiGroup Limited
Following the announcement that the managing director and CEO Tarek Robbiati would step down from the top job, the shares of FlexiGroup have fallen by more than 12%. Although Mr Robbiati had only joined FlexiGroup in 2013, he has overseen significant growth in the company during that time. Investors should naturally be more cautious when key personnel are replaced for any reason, but I believe the market may have over-reacted to this news.
Pleasingly for investors the underlying fundamentals of the business remain solid and the company confirmed it was on track to meet its FY15 profit guidance.
With the share price below $3, FlexiGroup is trading on a price-to-earnings ratio of less than 10 and a fully franked dividend yield of more than 5.5%. Investors should seriously consider buying at these levels.
SEEK Limited
Unfortunately for existing SEEK shareholders the recent trading update provided by management was not positive. The share price has fallen by as much as 15% since the announcement and many investors may be thinking if this is a buying opportunity.
The shares trade at a significant premium to the rest of the market and even at the current share price of $14, SEEK is trading on a multiple of around 25x FY15 earnings.
Although the company has many competitive advantages, problems in its SEEK Learning division have been the main cause of the profit downgrade. SEEK is still expecting solid revenue growth but is forecasting second half earnings to be the same as the first half and investors obviously had much higher expectations. The company also expects that FY16 earnings growth will be less than its usual level as a result of increased investment and reforms in the education sector.
The company will provide more guidance once it releases its FY15 results and I would be inclined to wait until then before buying any shares in SEEK. The stock is still trading at a substantial premium to the rest of the market and any further uncertainty could see the share price fall further.
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