Market panic creates bargains for the brave

There are plenty of opportunities still available for long-term investors, says Alec Cutler of Orbis Investments. Here, he picks three undervalued long-term winners.

Every stockmarket crash is different. But they are all the same in two respects: they are very scary at the time and they produce amazing long-term opportunities for investors who can remain calm and disciplined when they occur.

In the past few months we have been buying shares of world-class businesses at discounts that have rarely been on offer in the past decade, if not longer. As countries begin to reopen, markets are likely to remain volatile for some time.

We have no particular insight about when they will return to “normal”, or what precisely that would look like in a post-virus world, but we are enthusiastic about the opportunities that are still available for long-term investors.

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Sky’s US owner is too cheap

Our favourite situations are those where we disagree with the market’s pessimism. Excessive pessimism can sometimes create the opportunity to buy high-quality businesses that aren’t normally available at bargain prices. One example is Comcast (Nasdaq: CMCSA), the US cable and broadband provider that bought Sky in 2018.

In February and March investors knocked $60bn off Comcast’s market value in the space of weeks, in large part due to fears about the closure of its Universal Studios theme parks.

While this was hardly welcome news, the market overreacted. The theme parks account for only $2.5bn of annual operating income, which is about a tenth of the profit from Comcast’s utility-like cable and broadband services. The market offered us a chance to buy Comcast’s shares at just 12 times earnings – an offer we were happy to accept.

Cashing in on Chinese e-commerce

Alibaba (NYSE: BABA) also qualifies as a baby thrown out with the bathwater. As China’s dominant e-commerce company, Alibaba has grown revenues and earnings by roughly 50% a year throughout its history. At that rate, earnings double in 21 months. Such growth deserves a premium valuation, but during the panic Alibaba was available at 20 times trailing earnings, a 50% discount to its historical average.

Simplistically, a price-earnings multiple can be considered a crude payback estimate: the number of years it takes the firm to accumulate earnings equal to your investment, the share price. But that assumes the same earnings per share every year and ignores growth. If Alibaba can grow by “only” 20% per annum, it will earn its current market value in just eight years and at that point it would still be likely to offer growth potential worthy of a much higher valuation.

A resilient energy-services provider

Energy markets have suffered the double-whammy of a Saudi-Russia price war and a global economic shutdown. The world seems to have far more oil than it needs. But the supply-demand cycle is ultimately self-correcting. Founded nearly 100 years ago, Schlumberger (NYSE: SLB) has survived many ups and downs in the oil markets. The world’s leading energy-services firm – offerings range from fracking to deepwater drilling – successfully navigated the last downturn, generating substantial cash from operations each year. In this year’s panic Schlumberger plunged by more than 50%– wholly out of proportion to the likely impact of recent events on the company’s long-term fundamentals.

Alec Cutler

Alec Cutler, Bachelor of Science (Honours) in Naval Architecture (United States Naval Academy), Master of Business Administration (The Wharton School of the University of Pennsylvania), Chartered Financial Analyst. Alec joined Orbis in 2004. Based in Bermuda, he leads the multi-asset team, is one of the Portfolio Managers for the Orbis Global Balanced Strategy, and has overall responsibility for the Strategy. He previously worked for 10 years at Brandywine Asset Management LLC managing the Relative Value strategy, co-managing the Large Cap Value area and co-managing the firm as a member of the Executive Committee.