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Montgomery says high-quality stocks are trading at “compelling” values
With interest rates forecast to rise as early as next month, January provided a rude awakening for equity market investors, after markets fell as investors headed for the door. Chief investment officer of Montgomery Investment Management, Roger Montgomery, says, “It’s good news for investors.”
Rising inflation combined with weakening economic growth was enough to cause a de-rating among tech stocks and the broader market. Even high-quality companies were hit and now present compelling value, in his view.
“It’s during these corrections that some individual stocks fall by much more (than the market),” Montgomery says. “Those falls present investors with the opportunity to pay lower prices for excellent businesses that may have been recently out-of-reach.”
“Many decades ago, the late Ben Graham suggested investors buy stocks like they buy groceries: buy more of your favourite item when on sale. By way of (recent) example, I have always fancied the Australian-made Rhino storage and toolboxes available at Bunnings, but I could never stomach $129 for a plastic moulded box. In January, Bunnings held a sale for those same boxes, and they were just $30 each. I bought all three on the shelf. Investors should buy stocks the same way, holding out for attractive prices,” says Montgomery.
Montgomery reminds investors that the January sell-off is a great example of when to buy businesses. He says, “share prices can disengage from the underlying fundamentals, economics and potential of a business. It is during these periods, investors should be sharpening their pencils because, eventually, the share price will reflect the value the business is creating through the process of generating and retaining profits.”
Looking at the bigger picture, Montgomery is unconvinced that high inflation will continue and all that is needed to contain it, are a few rate hikes. High-quality companies that grow and increase earnings and their intrinsic value will withstand any interest rate rise, he says.
He concludes by saying the January sell-off was “a good old market correction – contained to equity markets – and should therefore be seen as an opportunity to add or begin investing. Above all, remember one thing: the lower the price you pay, the higher your return,” Montgomery says.
