My shares have plunged 40% but I’m buying like there’s no tomorrow: fundie

A man working in the stock exchange.A man working in the stock exchange.

It’s been a terrible year for mid- and small-cap ASX shares, and professional fund managers have fared no better than retail investors.

Montgomery Investment Management chief investment officer Roger Montgomery is no exception, recently making a stunning revelation about his personal holdings.

“When I first invested in the Polen Capital Global Small and Mid Cap Fund, I didn’t expect the unit price to decline by nearly 40%,” he said.

“But it has.”

That’s all good and well, but everyone’s portfolios are in the red right now.

The big question is whether it’s time to buy up bargains, or are there more falls to come?

“Several friends have asked me to let them know when I decide to make additional investments in equities,” he said on his blog.

“Of course, I can’t predict what will happen in markets in the short term… [But] over the longer term, I am acutely aware of the old investing aphorism: the lower the price you pay, the higher your return.”

Earnings will now rule the share market

The aggregate forward price-to-earnings ratio of the stocks in the Polen Capital fund was 44 when it started its journey.

Now that ratio has tumbled to 25 times.

Montgomery analysed this drop to figure out a clue about whether it’s time to buy.

“If I break up the PE multiple compression of the portfolio into its components, we find about 70% is due to lower prices but 30% is due to higher earnings the companies have generated,” he said.

“And that’s the point. Polen calculates the companies in the portfolio have grown earnings by nearly 25% per annum over the last five years on revenue growth of 18.5% per annum over the last five years.”

And forward earnings growth for the next five years is estimated to range between 20% and 25%.

‘I will be calling my banker’

The fact that an increase in earnings is a major contributor to the dramatic fall in PE ratios gives Montgomery much confidence.

“Unless the [US] Fed surprises with even more aggressive rate hikes, the future direction of the market should now be determined by earnings growth.”

He reckons that explains why Warren Buffett’s Berkshire Hathaway Inc (NYSE: BRK.A) bought up more than US$51 billion of shares in the March quarter.

“I trust you can see why I have instructed my banker to transfer additional funds into the Polen Capital Global Small and Mid Cap Fund,” said Montgomery. 

“And if the market continues to fall, I will be calling my banker again to continue the process of dollar cost averaging.”

A spanner in the works is possible though, in the form of a global recession.

Montgomery admits it’s possible, but unlikely.

“Current economic forecasts for the rest of 2022 and 2023 aren’t suggesting any negative rates of growth,” he said.

“So, with PEs now at recent historical lows, I’d prefer to look at the earnings growth of the companies we own.”

The post My shares have plunged 40% but I’m buying like there’s no tomorrow: fundie appeared first on The Motley Fool Australia.

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for over ten years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the five best ASX stocks for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now.

*Returns as of January 12th 2022

More reading

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Berkshire Hathaway (B shares). The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool Australia has recommended Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

from The Motley Fool Australia https://ift.tt/1z89iT4

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s