While attempting to time the market is a great idea in theory, doing so in practice can prove to be impossible. That's because there are a number of known unknowns that investors have no way of accurately predicting and which make share prices move in the opposite direction to that favoured by the investor. And, while timing is helpful in generating excellent long term returns, an acceptance that things may not go quite to plan in the short run can help investors to avoid worry, fear and frustration.
Take, for example, the resources sector. As a result of savage price falls, now may prove to be a superb moment to buy oil and mining companies that are trading at relatively low prices. The returns in the long run from here could be sensational but, in the short run, there is a chance that things could get worse before they get better.
For example, Woodside Petroleum Limited (ASX: WPL) is expected to post a fall in net profit of around 46% during the next two financial years as a result of falling oil prices. And, as the company's recent half-year results showed, Woodside is experiencing reduced production levels, higher debt levels and weaker cash flow as it struggles to adapt to a low oil price environment.
However, its results also contained some positive news, too. It remains cash flow positive and has a lower gearing level than it is targeting (with it being around 20% versus the long term goal of less than 30%). Therefore, Woodside has scope to continue with its recent strategy of making acquisitions of high-quality assets at relatively low prices. This should improve its long-term outlook and, with Woodside having a world-class asset base, it appears to be well positioned in the sector to ride out the present challenges and turn its profitability declines around. And, in the meantime, a dividend yield of 5.5% remains ahead of the ASX's yield of 4.6%.
Meanwhile, Newcrest Mining Limited (ASX: NCM) has also faced a challenging period, with the price of gold dropping to a five-year low earlier this year. However, its recent full-year results showed that it is making encouraging progress, with it returning to profitability following a loss in financial year 2014. Part of the reason for this was increased production and, looking ahead, it is expected to increase its bottom line by over 29% per annum over the next two years. This puts Newcrest Mining on a price to earnings growth (PEG) ratio of just 0.53, which is lower than the ASX's PEG ratio of 1.4.
Furthermore, while the outlook for the gold price is uncertain owing to a challenging outlook for the global economy, Newcrest Mining has become a leaner and more efficient business in recent years, with costs being cut and restructuring taking place. And, while dividends are not due to be paid until at least 2017, Newcrest Mining's price to book (P/B) ratio of 0.97 indicates considerable upside – especially since the ASX has a P/B ratio of 1.3.
As with Woodside Petroleum, Newcrest Mining appears to be in a relatively strong position compared to its sector peers and this means that, while the prices of oil and gold may come under more pressure in the short run, both companies have the potential to soar in the longer term.
