One of the best times to buy a share is when it is very unpopular and the price is depressed. If the reason for the shares being depressed is temporary and can be reversed, then buying can reward patient investors.
But too often this point is overlooked and people end up catching the proverbial falling knife, finding out later that the shares were not that cheap after all. Shares in bad businesses usually have low price tags for a good reason.
This is the problem facing prospective buyers of shares in this artificial sweetener maker right now. A few weeks ago the company issued a profits warning and its shares have been hammered.
The prices it can charge for its sucralose artificial sweetener, Splenda, are expected to fall by 15% this year due to large stocks of Chinese products flooding the market. Profits from Splenda, which account for about 20% of Tate & Lyle’s (LSE: TATE) earnings, will take a big hit.
All this is unfortunate as it masks the good things that are going on elsewhere. Tate & Lyle has some good products that could be very useful in combating the global obesity crisis (my colleague Matthew Partridge wrote about these in the magazine a couple of weeks ago).
In particular, its intense sweeteners Tasteva, which is based on stevia, and Purefruit, based on monk fruit, could have a lot of potential. Elsewhere, the company is also doing well with its speciality starches and low sodium salt substitute, which promote healthy living.
If the sales of these products can grow strongly over the next few years, then they will form a bigger part of the company’s profits and help lessen the worries about Splenda. They could also help Tate’s total profits to start growing again.
Of course, the sucralose problem could get worse than people expect as the Chinese try to get a foothold on the market. There’s also the possibility that sales of high fructose corn syrup, which goes into soft drinks, could fall as consumers cut back their intake.
Tate & Lyle shares look like they could fall further, as it seems likely that they will be relegated from the FTSE 100 index this week. This means that FTSE 100 tracker funds will have to sell them and push down the share price.
This could be good news for prospective buyers. Tate & Lyle shares look reasonably valued at just under 12 times forward earnings and offer a yield of 4.4% on a dividend that is expected to keep on growing. The company also appears to have strong finances. The shares look worth a punt.
Verdict: buy at 640p