THERE are often bargains to be had when negative sentiment sweeps across a sector. Add a volatile equity market and
even better value can appear, Sydney Morning Herald reports.
Billabong International is a standout candidate for the oversold stock award. Its share price had already fallen from about $10 in June 2010 to trade in the vicinity of $5 prior to the company releasing its result on August 19. It could have been argued that Billabong's poor performance was already factored into the share price, yet within a week of announcing the result, the company's share price had fallen by nearly 40 per cent to $3.28.
Billabong was hit by the perfect storm in the fiscal year of 2011. As well as having to contend with a decline in consumer spending, the company had currency issues to deal with, along with the challenges of integrating recently acquired businesses that will make a valuable contribution - but not until in the 2012 financial year.
Billabong is already ahead of the curve in terms of its direct-to-consumer and online retailing business. Management recently highlighted that the company's direct-to-consumer operations contributed 38 per cent of global sales revenue in 2010-11 and it believes that the company now has ''a more appropriate mix between wholesale business, online retailing and bricks-and-mortar retailing''.
Analysts at Macquarie have an outperform recommendation on Billabong with a 12-month price target of $7.50, indicating that investors who buy now could double their money in the next 12 months. This doesn't look unrealistic, given the price target implies a forward price-earnings ratio of 14, significantly below the multiple that has traditionally been attributed to the company.
It is also worth noting that Billabong hasn't traded at these levels for more than 10 years. The company achieved earnings per share of 46.6¢ in 2010-11. In 2003-04, when Billabong announced it had generated earnings per share of 43¢, its share price increased from $7.92 to more than $9 in less than a month.
Another former market darling-turned-ugly duckling is Fantastic Holdings, which has been hit from all angles. Not only has it had to contend with a downturn in consumer spending but the company has also felt the impact of a decline in housing. But the manufacturer and retailer of affordable furniture and bedding goods may be a stock to target at this point in the cycle because history would suggest the company should perform strongly as the aforementioned factors come full circle.
If you look at the company's performance in the past 10 years, it struggled after the introduction of the GST hurt the residential construction industry. But in mid-2000 the first home owner's grant was introduced.
As the impact of this gained traction between 2000-01 and 2002-03, Fantastic's revenues doubled, pre-tax profit increased from $6.2 million to $15.1 million and the company's share price doubled. This marked the start of a strong period of growth that saw the company's share price increase from about 40¢ in June 2000 to nearly $5 in 2004.
The company also benefited from an aggressive store roll-out strategy and management has continued to broaden the reach of the traditional Fantastic Furniture stores, as well as entering the bedding market and acquiring small chains of stores that offer a different customer experience.
However, this has required considerable investment during the past three years. The impact of integrating new businesses and investing in supply chain improvements, combined with the effect of negative macroeconomic factors, has led to a sharp downturn in growth.
Management's five-year plan is to increase store numbers across its network from about 130 to 200. A near-term stimulus package targeted at the construction industry, in particular entry-level home buyers, is not out of the question. Fantastic is perfectly positioned, as it was in 2000, to take advantage of such a development. Analysts at Macquarie have an outperform recommendation on the stock.
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