While pessimism can be bad news for share prices, it can prove to be a blessing for long term investors. That's because, while it can cause investor sentiment to weaken and to push valuations downwards, it also creates opportunities to buy a slice of top quality companies at even more appealing prices.
Certainly, it can take time for the views of the market to change and, as such, buying unpopular stocks or companies in unpopular sectors is no 'get rich quick' scheme. However, for patient investors, it fits in with the idea of buying low and selling high, with pessimism even making it possible to buy when 'blood is running in the streets', as John D Rockefeller famously stated.
One sector that is suffering from a high degree of pessimism is consumer retail. That's understandable, since consumer confidence is on a downward spiral and, while the RBA has attempted to improve the outlook for the sector (and the wider economy) through interest rate cuts, the reality is that they will take time to have an impact. As such, the cuts from earlier this year are unlikely to have made any difference as yet but, looking ahead to 2016, they have the potential to boost consumer spending and stabilise earnings for retailers.
As a result, the likes of diversified retailer, Wesfarmers Ltd (ASX: WES), and shopping centre operator, Scentre Group Ltd (ASX: SCG), appear to be worthy of purchase. For example, Wesfarmers is forecast to increase its bottom line at an annualised rate of 6.4% during the next two years which, given the outlook for the supermarket sector, would be a strong result. Despite this, it trades on an appealing price to sales (P/S) ratio of 0.78, which is lower than the ASX's P/S ratio of 1.38 and indicates that investors are somewhat unfairly pessimistic about Wesfarmers' future.
This, then, creates an opportunity for capital growth and, with Wesfarmers currently yielding 4.8%, it remains a top notch income play, too. Looking ahead, its dividends are expected to rise by more than inflation; 2.5% per annum over the next two years and, with it having a beta of just 0.64, Wesfarmers may prove to be a stable, as well as strong, performer.
Similarly, Scentre has produced rather lacklustre share price performance recently, with its valuation flat lining in the last six months. As such, it trades on a price to earnings growth (PEG) ratio of just 0.25, which is less than the ASX's PEG ratio of 1.41. Like Wesfarmers, Scentre stands to benefit from falling interest rates and, with it currently yielding 5.3%, continues to be more appealing as an income play than the ASX, which has a yield of 4.6%.
Furthermore, Scentre has an excellent asset base that should provide it with a strong long-term growth profile. And, having been spun-off from Westfield, it may be able to find additional efficiencies as its management team focuses on a more localised and smaller range of assets moving forward. This could positively impact on the company's margins and drive through additional profitability in future.
So, while pessimism in the consumer goods sector is relatively high, it presents an opportunity to buy high-quality stocks such as Wesfarmers and Scentre at appealing prices.
