In afternoon trade the S&P/ASX 200 Index (ASX: XJO) could be about to end its winning streak. The benchmark index is currently down 0.15% to 6,673.1 points.

Four shares that have fallen more than most today are listed below. Here’s why they are dropping lower:

Aroa Biosurgery Ltd (ASX: ARX)

The Aroa Biosurgery share price is down 3.5% to $1.27 following the release of its half year results. This morning the soft tissue regeneration company reported a 10% decline in revenue to NZ$9 million because of the pandemic. Things were worse for its earnings, with normalised earnings before interest, tax, depreciation, and amortisation (EBITDA) coming in at a loss of NZ$2.3 million. This compares to positive EBITDA of NZ$2.15 million a year earlier. Management expects to deliver revenue growth in the second half as restrictions ease. This will bring its FY 2021 revenue to at least NZ$21 million.

Straker Translations Ltd (ASX: STG)

The Straker Translations share price is down 6.5% to $1.49. Investors have been selling the translation services company’s shares after the release of its half year results this morning. Straker delivered a 9% increase in revenue to NZ$14.8 million and a small operating profit. It appears as though some investors were expecting a stronger result.

Virgin Money UK CDI (ASX: VUK)

The Virgin Money UK share price has crashed 9.5% lower to $2.35. This follows the release of its full year results this morning. For the 12 months ended 30 September, the UK-based bank posted a 77% decline in full year underlying net profit to 124 million pounds. This was driven largely by a huge increase in impairments to 501 million pounds from 153 million pounds in FY 2019. Excluding impairments, operating profit fell 10% to 625 million pounds due to weakening margins and base rate cuts.

Whitehaven Coal Ltd (ASX: WHC)

The Whitehaven share price has fallen 3.5% to $1.49. This may be due to reports that China is claiming that there is a quality problem with Australian coal. It currently has $700 million worth of the commodity sitting off the coast of two major Chinese ports after banning Australian coal imports in October.

More reading

• ASX 200 flat: Bega Cheese announces major acquisition, WiseTech reaffirms guidance
• Straker Translations (ASX:STG) share price flat after half year results release
• Aroa Biosurgery (ASX:ARX) share price falls as revenue declines
• The real earnings growth driver for ASX bank stocks in FY21 isn’t what you think
• 5 things to watch on the ASX 200 on Thursday

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Straker Translations. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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One of the biggest concerns I hear from retail investors is that ASX share prices are looking frothy.

Meaning that that the price-to-earnings (P/E) ratio of many ASX shares is running higher than their historical averages.

As you probably know, the P/E ratio is a way to measure a company’s current share price compared to its earnings-per-share (EPS).

For example, if a stock is trading for $18 and earning $1 per share, the P/E ratio is 18 times.

Now I use 18 for a reason here.

Andrew McAuley is the chief investment officer for Credit Suisse Group‘s (NYSE: CS) Australian Private Banking arm. And, as the Australian Financial Review reports, he calculates the 12-month forward P/E ratio for the S&P/ASX 200 Index (ASX: XJO) is 18 times. (The forward P/E ratio utilises estimated future earnings.)

McAuley says that’s 20% higher than the 10-year average for the ASX 200. Additionally, he notes that the MSCI World Index, with a forward P/E of 21.2 times, is 40% above its historical average.

So, investors aren’t off base when they mention share prices, overall, appear a bit frothy.

Which brings us to the first reason on ASX 200 share prices (and indeed, those across most global indices) could run far higher from here.

Reason 1

Rock bottom interest rates.

Interest rates in Australia are so low, in fact, that when you take inflation into account, the Reserve Bank of Australia’s (RBA) 0.1% official cash rate is effectively negative.

And RBA Governor, Philip Lowe, has made it clear the bank is highly unlikely to raise those rates anytime soon.

Credit Suisse’s McAuley points out that these record low rates are supporting the ASX and other share markets across the globe. And despite the elevated forward P/E ratios, he says, “If you look at the relative attractiveness of equities to bonds, the ASX still looks reasonable value.”

Reason 2

Low rates are one of the pillars supporting share markets during the pandemic-driven economic slowdown.

But as the global financial crisis (GFC) showed us in 2008, low rates alone aren’t enough. Back then, central banks the world over did cut rates. In Australia, the RBA slashed the official cash rate from 7.25% in August 2008 down to 3.0% by April 2009. (If only it had that much fire power left today!)

While rate cuts helped, governments largely held back with any fiscal stimulus. In fact, many nations went the other way, introducing austerity measures to rein in ballooning debt levels.

But this time is different.

Debt, with a nod of thanks to negative real (inflation adjusted) interest rates, has taken a back seat to spurring on locked down economies.

Which brings us to the second reason share prices on the ASX 200 could hit new record highs in the coming months.

Massive government stimulus packages.

Unlike the mismatched responses we saw during the GFC, the COVID-19 crisis has seen a coordinated approach between governments and their central banks. Governments the world over have unleashed trillions of dollars in stimulus spending and other support measures since the onset of the pandemic.

In Australia, JobKeeper and the boosted JobSeeker allowance have been crucial at keeping unemployment down and keeping money in consumers’ pockets.

Evan Brown, head of multi-asset strategy at UBS Asset Management, explains this combined approach from central banks and governments has opened the door to higher P/E ratios (quoted by Bloomberg):

There’s probably a higher floor to multiples because the market will know that as soon as we hit that recession, you’re getting not just the monetary policy offset but fiscal as well. And so what that does is cut off the left tail and leaves markets to explore higher multiples perhaps than would have been the baseline before.

Indeed…

Reason 3

The ASX 200 is populated, mostly, by quality companies with strong management and good growth outlooks.

Some ASX 200 shares, especially in the technology space, have actually benefitted from the changes inflicted by the virus as people shifted to working, shopping and socialising from home.

But many ASX 200 share prices remain depressed from their pre-COVID levels. That’s especially true in the travel and leisure sectors.

Which brings us to the third reason the ASX 200 could be poised to set new all-time highs.

The rollout of an effective vaccine.

November has delivered not one, but three potential vaccines, all reporting to be more than 90% effective in late stage trials.

Now even if all three are approved for mass production shortly, global vaccinations won’t happen overnight.

But as Mike Loewengart, managing director of investment strategy at E*Trade Financial, reminds us, markets are forward looking (quoted by Bloomberg):

We remain on fragile footing heading into the winter as cases continue to climb globally. And since the markets are forward looking, this data will likely be taken in stride. The markets tend to cheer on certainty so the presidential transition and vaccine developments are two factors it’s latched onto lately.

As for the outlook for the Aussie economy and the ASX?

Shane Oliver, AMP Capital’s head of investment strategy says (from the AFR):

The Australian economy and share market with their relatively high exposure to resources and financials are relatively cyclical in contrast to the US that has a higher exposure to ‘growth’ sectors like IT and healthcare. If the combination of a vaccine and global stimulus drives a strong global economic recovery in 2021 then the Australian economy, shares and Australian dollar are likely to be relative beneficiaries.

Down 0.3% in intraday trade, the ASX 200 needs to gain 7.49% to set a new record high.

More reading

• Why Harvey Norman, Northern Star, Stockland, & TechnologyOne shares are charging higher
• Why the Jumbo (ASX:JIN) share price is rising again today
• Stockland (ASX:SGP) share price up 3% after new chief announced
• ASX 200 flat: Bega Cheese announces major acquisition, WiseTech reaffirms guidance
• Is the Harvey Norman (ASX:HVN) share price good value?

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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In early afternoon trade the S&P/ASX 200 Index (ASX: XJO) is on course to end its winning run. At the time of writing, the benchmark index is down 0.2% to 6,668.5 points.

Four shares that are not letting that hold them back are listed below. Here’s why they are charging higher:

Harvey Norman Holdings Limited (ASX: HVN)

The Harvey Norman share price is up 6% to $4.85. This follows a positive reaction from brokers to the retailer’s trading update yesterday. One broker that liked what it saw was Credit Suisse. This morning it retained its outperform rating and $5.06 price target on the company’s shares.

Northern Star Resources Ltd (ASX: NST) 

The Northern Star share price is up over 3% to $12.93. This appears to have been driven by a small recovery in the gold price and an update on its merger with Saracen Mineral Holdings Limited (ASX: SAR). That update revealed that all Northern Star financier consents and material Saracen facilities and relevant agreements consents required under their merger implementation deed have been obtained and are now satisfied. A number of other conditions, such as shareholder approval are still required. The Saracen share price is also up 3%.

Stockland Corporation Ltd (ASX: SGP)

The Stockland share price is up 2% to $1.65 after naming its new chief executive officer. The retail property company has appointed Lendlease Group (ASX: LLC) chief financial officer, Tarun Gupta, as its new leader. He will join the company in June 2021. Current CEO, Mark Steinert, is retiring from the role after over 7 years with the company.

TechnologyOne Ltd (ASX: TNE)

The TechnologyOne share price is up 4.5% to $9.45. Investors have been buying the enterprise software company’s shares after brokers responded positively to its full year results. Morgans has retained its add rating and lifted its price target to $9.99. TechnologyOne’s FY 2020 result was better than it expected and it was pleased with management’s positive commentary for the year ahead.

More reading

• Stockland (ASX:SGP) share price up 3% after new chief announced
• ASX 200 flat: Bega Cheese announces major acquisition, WiseTech reaffirms guidance
• Is the Harvey Norman (ASX:HVN) share price good value?
• Northern Star (ASX:NST) and Saracen (ASX:SAR) shares on watch after merger update
• Top brokers name 3 ASX shares to buy today

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Jumbo Interactive Ltd (ASX: JIN) share price is inching higher today after the company announced it has secured a software licence approval in Great Britain. At the market open, the Jumbo share price originally jumped to $14.10 before retreating to $13.92 at the time of writing for a 0.07% gain so far today. This compares to S&P/ASX 200 Index (ASX: XJO) which is down 0.25% to 6,677 points in intraday trading.

What did Jumbo announce?

The Jumbo share price is creeping up following the company’s report that the Gambling Commission approved and issued a remote gambling software operating licence.

Jumbo will now begin to supply its software-as-a-service (SaaS) platform to licenced operators under the Gambling Commission’s umbrella. This will allow end-consumers to use Jumbo’s gambling and lottery services in Great Britain.

The newly approved software operating licence is an extension of Jumbo’s United Kingdom subsidiary, Gatherwell. The latter holds external lottery manager operating licences (remote and non-remote).

Pleasingly for the company, Jumbo stated that it is able to provide its UK market an increased offering. This includes both a SaaS platform, and a managed charities solution operated by Gatherwell.

What did management say?

Commenting on the positive announcement, Jumbo CEO and executive director, Mr Mike Veverka, said:

We are delighted to achieve this international expansion milestone which, together with our local subsidiary Gatherwell, will drive our growth strategy in the UK charities market. This is an important step in Jumbo expanding its footprint in the UK following the great work carried out by the Gatherwell team to date.

Addressable market

Jumbo revealed that there are currently 168,168 registered charities in England and Wales. These organisations had total estimated revenue inclusive of grants, donations, lotteries and other fundraising activities of 77.404 billion pounds as at 30 September 2018. According to Jumbo, its immediate addressable market is estimated at around 775 million pounds in lottery sales via ‘Society Lotteries’ and local authority lotteries.

This highlights the scope of opportunity that lies ahead if Jumbo can manage to substantially penetrate this market. 

About the Jumbo share price

The Jumbo share price has accelerated since the beginning of the month, delivering 28% gains for shareholders. While still materially down from its pre-COVID-19 levels of above $20, Jumbo has been focusing its strategy on digital expansion.

Should it be able to further harness consumers around the world onto its online platform, the Jumbo share price could shoot higher.

More reading

• Fundie names 5 ASX shares with good growth prospects
• Why Elders, Jumbo, Northern Star, & PolyNovo shares are charging higher
• Jumbo (ASX:JIN) share price on watch following signed Lotterywest agreement
• 2 ASX mid cap shares that are growing strongly
• Leading brokers name 3 ASX shares to buy today

Aaron Teboneras owns shares of Jumbo Interactive Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. recommends Jumbo Interactive Limited. The Motley Fool Australia owns shares of and has recommended Jumbo Interactive Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Stockland Corporation Ltd (ASX: SGP) share price is up today after the company announced the appointment of a new chief executive officer.

Industry veteran Tarun Gupta will replace Mark Steinert, who has been at the helm since 2013 and announced his retirement from the company in June. At the time of writing, the Stockland share price is trading up 3.07% at $4.70.

Why is the Stockland share price lifting?

In announcing the appointment, Stockland said Mr Gupta would bring plenty of experience to the CEO position. He is the current chief financial officer at Lendlease Group (ASX:LLC), having first joined that company as a graduate and holding a variety of senior positions across 26 years.

Stockland described Mr Gupta as “the right man for the job”, with deep commercial experience and a proven track record in leading and managing large property operations. The company also said that Mr Gupta was highly regarded in the industry, and had a strong reputation among property investors. 

Mr Gupta will join Stockland on 1 June 2021, and Mr Steinart will remain as CEO until then. Meanwhile, Lendlease announced that its deputy chief financial officer, Frank Krile, will step into the group chief financial officer role on an interim basis.

Mr Gupta will earn a fixed remuneration of $1.5 million annually, in addition to long-term and short-term incentives.

Challenging times ahead for Stockland

Mr Gupta will join Stockland at a time of big challenges. 

More than half of the Stockland’s earnings comes from its retail property portfolio. Of Stockland’s 34 retail shopping centres, 24 are tenants in the challenged department store sector. The department store business model is under increasing pressure from online competition.

In addition, 9 of Stockland’s 34 sites include Target stores. Target owner Wesfarmers Ltd (ASX: WES) has announced plans to close half its Target stores or rebadge them as K-Mart. Given Stockland already has 14 K-Mart stores, 9 of them at the same locations as its Target stores, this could be challenging scenario for Stockland. 

How has the Stockland share price performed in 2020?

The Stockland share price has rebounded strongly after losing 60% of its value in March at the height of the coronavirus pandemic. At $4.70, the Stockland share price is now back to almost the same level it was at the beginning of the year. The company commands a market cap of $10.9 billion. 

More reading

• 3 ASX companies named and shamed as worst in industry
• Why these ASX 200 shares just hit record highs
• ASX stock winners from the $23 billion Victorian state budget
• Could Citi’s forecast spell good news for the Lendlease (ASX:LLC) share price?
• Leading brokers name 3 ASX shares to buy today

Motley Fool contributor Eddy Sunarto has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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At lunch on Thursday the S&P/ASX 200 Index (ASX: XJO) is running out of steam and threatening to end its winning streak. At the time of writing, the benchmark index is roughly flat at 6,678.1 points.

Here’s what is happening on the market today:

Bega Cheese announces major acquisition.

The Bega Cheese Ltd (ASX: BGA) share price is in a trading halt today whilst it aims to raise a total of $401 million via an underwritten entitlement offer and placement. The proceeds will be used to partly fund the acquisition of Lion Dairy & Drinks for $534 million. Lion Dairy & Drinks is the business behind a wide range of brands such as Dare, Farmers Union, Juice Brothers, Pura, and Yoplait. Management expects the acquisition to be double digit earnings per share accretive in FY 2022.

Virgin Money UK sinks.

The Virgin Money UK CDI (ASX: VUK) share price is sinking lower following the release of its full year results. For the 12 months ended 30 September, the UK-based bank reported a 77% drop in full year underlying pre-tax profit. This decline was driven largely by a sizeable 501 million pound impairment charge in relation to an expected surge in bad loans because of COVID-19. This led to analysts at Macquarie downgrading its shares to a neutral rating this morning. It has a $2.70 price target on its shares.

WiseTech Global reaffirms guidance.

The WiseTech Global Ltd (ASX: WTC) share price is pushing higher on Thursday after it reaffirmed its guidance for FY 2021. The logistics solutions company expects revenue of $470 million to $510 million and EBITDA of $155 million to $180 million. This represents growth of 9% to 19% and 22% to 42%, respectively. However, it is worth noting that the company has warned that the ongoing and longer-term impacts of COVID-19 are still not completely predictable.

Best and worst ASX 200 performers

The best performer on the ASX 200 on Thursday has been the Harvey Norman Holdings Limited (ASX: HVN) share price with a 5.5% gain. This morning Credit Suisse retained its outperform rating and $5.06 price target in response to its trading update yesterday. The worst performer has been the Virgin Money UK with an 8% decline following its full year results release.

More reading

• Is the Harvey Norman (ASX:HVN) share price good value?
• Bega Cheese (ASX:BGA) announces $534 million Lion Dairy & Drinks acquisition
• Why the WiseTech Global (ASX:WTC) share price is climbing higher today
• The real earnings growth driver for ASX bank stocks in FY21 isn’t what you think
• 5 things to watch on the ASX 200 on Thursday

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of WiseTech Global. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Harvey Norman Holdings Limited (ASX: HVN) share price could still have room to grow according to one leading broker.

Who is positive on Harvey Norman?

A note out of Goldman Sachs this morning revealed that its analysts have retained their buy rating and put a $4.90 price target on this retail giant’s shares following the release of its annual general meeting update yesterday.

That update revealed that Harvey Norman’s aggregated sales revenue increased by 28.2% between 1 July and 21 November compared to the prior corresponding period. This has been driven by strong same store sales growth across almost all regions over the period.

Things were even better on the bottom line. Thanks to margin expansion, the company’s unaudited profit before tax for the period 1 July to 31 October was up a massive 160.1% on the prior corresponding period.

Goldman believes the company’s growth will inevitably slow in the second half but has increased its forecasts to account for stronger than expected sales trends and operating leverage.

It said: “We maintain our expectations that the strong growth seen over 2H20 and into 1H21 is unlikely to be sustained once the industry starts to cycle through the strong base in 2H21.”

“However, we revise sales forecasts to reflect the stronger ongoing sales trend and operating leverage resulting in EBIT revisions of +28.7% in FY21, but less significantly at +3.1% in FY22. Our revised PBT forecasts imply growth of +75.7% over the more significant Nov/Dec period, after +185.9% in Jul/Aug and +136.7% in Sep/Oct,” Goldman added.

Why buy Harvey Norman shares?

The broker sees Harvey Norman as a great option for income investors due to its generous yield.

It explained: “[its target price] now offering a potential total return of 15.7% driven by strong dividend yield support. We forecast HVN is trading at 13.8x PE and offers a 6.5% fully franked dividend yield in FY22. We maintain our Buy rating on HVN and the stock remains a preferred exposure in the discretionary retail sector.”

More reading

• ASX 200 up 0.8%: Fisher & Paykel Healthcare impresses, Harvey Norman’s profits surge
• Harvey Norman (ASX:HVN) share price higher on stellar sales update
• 5 things to watch on the ASX 200 on Wednesday
• ASX 200 Weekly Wrap: ASX continues to climb, despite outage
• 5 things to watch on the ASX 200 next week

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Bega Cheese Ltd (ASX: BGA) share price remains in a trading halt on Thursday whilst it undertakes a capital raising to fund a major new acquisition.

What did Bega Cheese announce?

This morning Bega Cheese announced the launch of a $401 million underwritten entitlement offer and placement to fund the acquisition of Lion Dairy & Drinks for $534 million.

According to the release, this will comprise a 1 for 4.5 pro-rata accelerated non-renounceable entitlement offer of approximately $220 million and an institutional placement of approximately $181 million.

These funds will be raised at an offer price of $4.60 and through the issue of approximately 87 million new shares. This offer price represents a 9.1% discount to its last close price.

What is Lion Dairy & Drinks?

Lion Dairy & Drinks’ core business is the manufacture, marketing, sales and distribution of:

• Milk Based Beverages (Dare, Farmers Union, Big M, Masters, Dairy Farmers)
• Yoghurt (Yoplait, Farmers Union, Dairy Farmers)
• Chilled Juices (Juice Brothers, Daily Juice)
• Cream and Custard (Pura, Dairy Farmers)
• White Milk (Pura, Dairy Farmers, Masters).

Lion Dairy & Drinks also has Australia’s largest national cold chain distribution network supplying food service and convenience stores and a national manufacturing footprint comprising 13 sites.

Management expects the acquisition to create significant value for shareholders.

Bega Cheese’s Executive Chairman, Barry Irvin, commented: “We are delighted to announce this acquisition which we believe will create significant value for shareholders. The acquisition delivers important industry consolidation and value creation with synergies across the entire supply chain. The expanded product range, manufacturing and distribution infrastructure and brand portfolio realises our ambition of creating a truly great Australian food company.”

Financials.

The combined business is expected to generate revenue in excess of $3 billion.

Lion Dairy & Drinks delivered pro forma normalised EBITDA of $56 million (post-AASB 16) excluding synergies for the 12 months to 30 September.

Base case synergies of $41 million per annum are expected. This is primarily from milk network optimisation, indirect procurement, and a corporate reorganisation.

All in all, the deal is expected to be double digit earnings per share accretion in FY 2022.

Bega Cheese’s Chief Executive Officer, Paul van Heerwaarden, concluded: “We are very pleased with the performance of acquisitions made in recent years which are achieving or exceeding our profit targets. The recent company restructure and ERP implementation will allow us to integrate this Acquisition and take advantage of the various synergies and growth opportunities across domestic and international markets.”

More reading

• Is the Harvey Norman (ASX:HVN) share price good value?
• Don’t waste the stock market crash! I’d use Warren Buffett’s strategy to profit from it
• Will Netflix stock crash in 2021?
• Citadel (ASX:CGL) share price flat as scrip offer approved
• Gentrack (ASX:GTK) share price slips following mixed full-year results

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The 2020 stock market crash may have left some investors feeling cautious about the idea of buying shares. A weak economic outlook and political risks in Europe may mean that they sell equities and invest in lower-risk assets.

However, investors such as Warren Buffett have previously avoided such a strategy. Instead, he has sought to use a market decline to his advantage. It enables him to buy high-quality companies when they trade at low prices. Over the long run, this can produce impressive returns that lead to outperformance of indexes such as the S&P 500 Index (SP: .INX) and FTSE 100 Index (FTSE: UKX).

Buying cheap shares after a stock market crash

The stock market crash has caused a wide range of companies to trade at relatively low prices. Certainly, some sectors have recovered in recent months. However, others such as financial services companies, energy businesses and leisure stocks continue to trade at prices that are lower than their historic averages.

Warren Buffett has always sought to buy companies when they offer a wide margin of safety. In other words, when they trade for less than they are worth. This is often caused by temporary weak operating conditions that could give way to an improving outlook over the long run. Therefore, buying cheap shares that have the potential to recover could lead to impressive capital returns that are ahead of the wider index.

Focusing on quality stocks

Of course, not all shares will recover after a stock market crash. Some businesses may fail to evolve in line with consumer tastes. Or, weak operating conditions may mean that their poor financial positions are exposed.

Therefore, Warren Buffett has sought to purchase high-quality stocks after a market decline. For example, they may be businesses with low debt levels that mean they can outlast their sector peers during a period of challenging operating conditions. Similarly, they could be companies with wide economic moats that enable them to outperform sector peers in a weak market and as the economic outlook improves.

As such, focusing on strong businesses with a competitive advantage could be a means of improving an investor’s prospects after a stock market crash. It may reduce risk and improve long-term returns.

Buffett’s long-term view

Recovering from a stock market crash can take a prolonged period of time. For example, it took many companies several years to fully recover from the effects of the global financial crisis.

As such, investors such as Warren Buffett have been successful because they allow their holdings a long period of time to fulfil their potential. This can mean disappointing returns in the short run if the market experiences further volatility and declines. However, a patient approach can be beneficial to an investor’s returns in the long run. It could lead to market outperformance and a higher portfolio value in the coming years.

More reading

• Will Netflix stock crash in 2021?
• Citadel (ASX:CGL) share price flat as scrip offer approved
• Gentrack (ASX:GTK) share price slips following mixed full-year results
• Straker Translations (ASX:STG) share price flat after half year results release
• The Nitro (ASX:NTO) share price is down 20% in a month. Time to invest?

Motley Fool contributor Peter Stephens has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The clock is ticking on 2020, and Netflix Inc (NASDAQ: NFLX) investors can’t complain. Shares of the leading premium streaming service provider have risen 49% through Tuesday’s close, fueled by another year of healthy growth and a platform that has made the most of the new normal by entertaining a growing number of folks who are spending more time at home than usual.

Next year might not be as kind. Rivals are starting to heat up, and a recent price hike may make Netflix more expendable. The emergence of viable vaccines and treatments for COVID-19 may find us hungry for a return to entertainment outside of the home. We also can’t dismiss the reality that Netflix stock isn’t cheap by most conventional measuring sticks. This year has been great for shareholders. We may not be saying the same thing about 2021. 

The crown

Netflix has historically moved higher on odd-numbered years. It was the S&P 500 Index‘s (SP: .INX) biggest gainer in 2013 and 2015 with triple-digit gains each time. It trounced the market with its 55% pop in 2017. Last year’s 21% gain was pedestrian by previous odd-year standards, and actually lost to the market’s nearly 30% return. 

There will be challenges in 2021. Let’s start with the 800-pound Dunder Mifflin fan base in the room. Netflix will lose The Office in January. The cult-fave sit-com will stream exclusively on NBC’s fledgling Peacock platform after this year. It lost Friends to HBO Max earlier this year.

Netflix no longer corners the market on premium streaming success. Several major media stocks including Walt Disney Co (NYSE: DIS), Apple Inc (NASDAQ: AAPL), Comcast Corporation (NASDAQ: CMCSA), and AT&T Inc. (NYSE: T) have jumped into the market in the past 13 months, and that includes Disney+, which has amassed 73.7 million subscribers in its first year of service. There’s no denying that Netflix still wears the crown when it comes to being the ultimate streaming kingmaker. It’s no surprise that The Queen’s Gambit and the latest season of The Crown were trending in November. Netflix has a huge advantage over the competition in both the size of its digital audience and the data it has collected on their streaming preferences. 

However, we can’t just ignore that Netflix did raise its monthly rate last month for US subscribers. The 8% increase may not seem like much — and the market initially applauded the late-October move — but Netflix growth took a hit the last time it boosted its prices. The early 2019 pricing increase and Netflix subsequently falling woefully short of its account growth targets in back-to-back reports explain why the stock lost to the market last year. Since then we’ve seen the arrival of Disney+, Apple TV+, HBO Max, and Peacock. Will a royal flush beat a full house?

The bullish counterargument here is that Netflix finds a way. Streaming services are also reasonably cheap enough that most consumers are subscribing to several services. Netflix is a hit factory through thick and thin, and it has thrived this year even as we’re several months deep into a recession. 

I’m not selling my shares of Netflix, but I’m heading into 2021 with a guarded approach. Revenue and subscriber growth should decelerate next year. Unlike the big gains of 2013, 2015, and 2017, it wouldn’t be a shock to see the stock underperform the market the way it did in 2019. An outright crash seems unlikely. Streaming is here to stay. However, the year ahead could prove challenging to the top dog in this suddenly crowded market.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Rick Munarriz has positions in Disney, Netflix, Apple, and AT&T. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Apple, Netflix, and Walt Disney. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. recommends Comcast and recommends the following options: long January 2021 $60 calls on Walt Disney and short January 2021 $135 calls on Walt Disney. The Motley Fool Australia has recommended Apple, Netflix, and Walt Disney. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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