Tag: Motley Fool

The Arafura Resources Ltd (ASX: ARU) share price is rocketing north today despite no new announcements from the company.

At the time of writing, the rare earth developer’s shares have shot up 10.34% to 32 cents apiece.

Why are Arafura shares picking up today?

Investors are bidding up the Arafura share price alongside a strong rebound across the S&P/ASX 200 Materials Index (ASX: XMJ).

After falling 10% in a week, the materials sector is gaining ground by 1.20% to 15,290 points today. This makes it the second best performing index across the ASX at the time of writing, behind the S&P/ASX 200 Energy Index (ASX: XEJ).

It also appears that investors may be taking advantage of last week’s share price weakness in Arafura. The share nosedived 3.13% last Thursday and 6.45% on Friday.

Earlier this month, the S&P Dow Jones Indices announced its quarterly rebalance, adding Arafura shares to the S&P/ASX 300 Index (ASX: XKO).

The ASX 300 comprises 300 of the largest ASX companies based on market capitalisation.

Most fund managers are required to buy or sell shares within specific indexes such as the ASX 300. With this in mind, some investors like to take pre-emptive action by buying these shares before they become accessible to fund managers.

The changeover will take place on 19 September 2022.

Arafura share price summary

Despite tumbling in recent times, the Arafura share price is up 88% over the last 12 months.

The company’s share price year-to-date has also fared considerably well in spite of the volatility, up 52%.

The company’s share price reached an all-time high of 50 cents on 5 April, before moving in circles over the past 5 months.

Based on today’s price, Arafura has a market cap of around $551 million.

The post Why is the Arafura share price surging 10% on Monday? appeared first on The Motley Fool Australia.

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More reading

• Why is the Arafura share price leaping 5% today?
• 3 ASX mining shares primed for an ‘exponential’ energy transition: expert
• Arafura share price rebounds 9% following last week’s sell-off

Motley Fool contributor Aaron Teboneras has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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 Appen Ltd (ASX: APX) share price is deep in the red year to date, currently down almost 68%.

That’s more than double the loss of the S&P/ASX 200 Info Technology Index (ASX: XIJ) which has lost around 31%.

And it’s more than eight times the loss of the broader market, with the S&P/ASX 200 Index (ASX: XJO) down 8% in 2022 so far.

Certainly, the artificial intelligence (AI) technology company is not alone in its struggles.

Tech sector challenges

Technology stocks went through a sector rotation after climbing to new all-time highs near the tail-end of 2022. Valuations of these companies surged during the pandemic, then carried higher on the euphoria of a bull market rally for equities. This was courtesy of stimulus measures in the US and record high user and engagement metrics with people being trapped in their homes.

Tech shares did very well during the pandemic but faltered once the challenges of the post-COVID world started to unravel. As surging inflation, rising interest rates, and a slowdown of global growth started to bite, investors began to question their investments in these highly overvalued companies. As a result, many changed their risk appetites from growth to value shares.

An additional headwind that Appen faced was Candian firm Telus withdrawing a $1.2 billion takeover bid in May.

This is the narrative the company’s CEO Mark Brayan has been tasked to challenge as he attempts to turn the Appen share price around.

Brayan was interviewed by The Australian, where he outlined his strategy. Let’s piece together the highlights and see if Appen could be on the rebound.

What did Appen CEO Mark Brayan say?

Brayan stated the company has its eyes on expanding beyond the tech sector in the near future, stating:

We want to grow beyond our top five customers. We rely very heavily on the tech giants. Our customers like us to keep the work we do with them confidential, so we don’t name those companies, but nonetheless they’re the biggest tech companies in the world, and they comprise a very large share of our revenue.

But clearly, we need to have a broader customer base, and we’re working on that. This chapter for us is about growing beyond the tech giants.

Brayan also commented on the effect of the sector rotation and its growth changing to a lower gear. He also outlined plans for getting Appen back on its feet:

When you’re in a high-growth phase, the market rewards you, and when the growth slows down, at a time when there are, you know, other pressures on the sector, they compound to put the pressure on. We are reviewing all areas of the business in order to accelerate productivity improvements and margin expansion. We’re looking at every aspect of the business to improve those elements.

Brayan also noted an opportunity for expanding AI facial recognition technology.

There are some really awful examples of AI, for example facial recognition doesn’t work for certain ethnicities and in certain countries. What we’re super passionate about is providing high-quality data to our customers so their AI platforms perform really well.

Most recently, Appen released its state of AI and machine learning report that said 42% of its target market finds sourcing accurate data “very challenging” for training AI models.

Appen chief product officer Sujatha Sagiraju said:

Sourcing high-quality data is critical to the success of AI solutions, and we are seeing organizations emphasise the importance of data accuracy.

Appen share price snapshot

The Appen share price is down 18% over the past month. By comparison, the S&P/ASX 200 Index (ASX: XJO) is down 2.13% over the same period.

Shares of the data company currently trade for $3.61 each. That’s a long way from their high of more than $40 a share in August 2020.

The company’s current market capitalisation is roughly $446 million.

The post Down 68% so far in 2022, can Appen shares ‘get through this?’ appeared first on The Motley Fool Australia.

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More reading

• Why did the Appen share price just hit a 5-year low?
• Which crypto is ASX 300 tech company Appen holding and why?
• Appen share price rockets then stalls on US$9m half-year loss
• Appen share price on watch as interim dividend scrapped
• Earnings preview: Here are the ASX shares reporting today

Motley Fool contributor Matthew Farley 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 Appen Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. 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.

What happened

Few people were hot on cryptocurrency investments this sweltering weekend; Cardano (CRYPTO: ADA) was one of the rare exceptions. After its co-creator nailed a concrete date for a major upgrade of the blockchain platform, investors traded it up through the weekend. As of mid-afternoon Sunday, its value had risen by 4% over the preceding 24 hours.

So what

Friday morning, Cardano’s co-founder, Charles Hoskinson, announced that that upgrade is going to occur on Thursday, Sept. 22. It will take the form of a hard fork, i.e., a new, separate, and non-backward-compatible blockchain from the original, which is titled Vasil.

The pop in Cardano’s value was due in no small part to a cocktail of relief and hope. Vasil’s launch was originally scheduled for June and subsequently experienced more delays.

Cardano has attracted much investor interest since its launch in 2017. Hoskinson was a co-founder of Ethereum, currently the leader in decentralized applications (dApps) and smart contracts. Cardano is being developed basically to be a faster and more efficient dApp and smart contract platform.

According to a post on the site of Input Output Global, the so-called “driving force” behind Cardano, Vasil “will bring significant improvements using Cardano’s hard fork combinator (HFC) approach and enhance the network’s performance by increasing throughput, script efficiency, and reducing latency in block transmission.”

Now what

Crypto investors have been starved of good news lately, with negative macroeconomic trends such as inflation favoring assets considered to be relatively safer and less speculative. With its creators’ goal of making a low-friction blockchain, perhaps even one that can usurp Ethereum, Cardano is already a compelling crypto play. Fresh news of the impending upgrade is getting investors that much more excited about its prospects.

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

The post Why Cardano was trouncing other cryptos this weekend appeared first on The Motley Fool Australia.

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More reading

• Cardano is now on Robinhood. Should you be bullish?

Eric Volkman has positions in Ethereum. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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

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At the start of each week, I like to look at ASIC’s short position report to find out which shares are being targeted by short sellers.

This is because I believe it is well worth keeping a close eye on short interest levels as high levels can sometimes be a sign that something isn’t quite right with a company.

With that in mind, here are the 10 most shorted shares on the ASX this week according to ASIC:

• Flight Centre Travel Group Ltd (ASX: FLT) remains the Australian share market’s most shorted share after its short interest rose to 15.4%. Although there have been some encouraging updates out of the travel sector, short sellers appear to believe investors are expecting too much given how rising living costs are squeezing budgets. Particularly in Europe where energy prices have risen extraordinarily.
• Betmakers Technology Group Ltd (ASX: BET) has seen its short interest rise to 13.4%. Short sellers have been adding to their positions after this betting technology company posted a massive $89.2 million loss in FY 2022.
• De Grey Mining Limited (ASX: DEG) has short interest of 10.6%, which is down slightly week on week. There may be concerns that cost inflation could lead to the Mallina Gold Project costing more than expected.
• Block Inc (ASX: SQ2) has short interest of 10.4%, which is down slightly week on week once again. Concerns over a potential US recession and the market’s aversion to loss-making tech stocks have been weighing on Block’s shares.
• Nanosonics Ltd (ASX: NAN) has short interest of 10.3%, which is down a touch week on week. Rising costs, a disappointing full year result, and product launch delays have hit this infection prevention company’s shares.
• Lake Resources N.L. (ASX: LKE) has short interest of 9.9%, which is down week on week. This lithium developer’s shares have rallied very strongly recently but short sellers aren’t giving up on it.
• Zip Co Ltd (ASX: ZIP) has seen its short interest ease slightly to 9.5%. This buy now pay later provider’s shares have just been dealt a blow by being dumped out of the ASX 200 index at the next rebalance.
• City Chic Collective Ltd (ASX: CCX) has jumped into the top ten with short interest of 9.35%. Short sellers will have been pleased to see this plus sized fashion retailer’s shares crash after the release of a very disappointing full year result. City Chic’s shares have also just been kicked out of the ASX 200.
• Regis Resources Limited (ASX: RRL) has short interest of 8%, which is down week on week yet again. Short sellers appear to be closing positions slowly but surely. Production issues have been weighing on this gold miner’s shares.
• Inghams Group Ltd (ASX: ING) has short interest of 8%, which is down week on week. This poultry company may have been targeted due to concerns over higher input costs.

The post These are the 10 most shorted ASX shares appeared first on The Motley Fool Australia.

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More reading

• Why these 3 ASX shares could be in for a massive boost this month
• Zip shares on watch amid ASX 200 ousting
• 5 things to watch on the ASX 200 on Monday
• Zip and these shares have been kicked out of the ASX 200 index
• Here are the top 10 ASX 200 shares today

Motley Fool contributor James Mickleboro 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 Betmakers Technology Group Ltd, Block, Inc., Nanosonics Limited, and ZIPCOLTD FPO. The Motley Fool Australia has positions in and has recommended Block, Inc. and Nanosonics Limited. The Motley Fool Australia has recommended Betmakers Technology Group Ltd and Flight Centre Travel Group Limited. 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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Motley Fool Australia Chief Investment Officer Scott Phillips joined Peter Overton for Nine’s Late News on Sunday night to discuss the big week ahead for homeowners and investors alike, with the Reserve Bank of Australia likely to hike rates and GDP hopefully showing the economy continues to grow strongly.

[youtube https://www.youtube.com/watch?v=ePsPPYhtM3o?feature=oembed&w=500&h=281]

The post Rate rise on the agenda, and high hopes for GDP. Scott Phillips on Nine’s Late News appeared first on The Motley Fool Australia.

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More reading

• Why these 3 ASX shares could be in for a massive boost this month
• Why is the Fortescue share price sinking 6% today?
• Financial powerhouse: Why I think these stats make Xero shares irresistible
• Want to snare the next CSL dividend? Read this
• Down 19%, is it safe to invest in the stock market now?

Motley Fool contributor Scott Phillips has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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Outstanding company performance and favourable economic conditions are obviously fantastic for ASX shares.

But occasionally stocks might get a nice boost from an unexpected circumstance.

That’s exactly the great fortune Johns Lyng Group Ltd (ASX: JLG), Sayona Mining Ltd (ASX: SYA), and Lovisa Holdings Ltd (ASX: LOV) investors find themselves in this month.

That’s because those three ASX shares have been named as new additions to the S&P/ASX 200 Index (ASX: XJO).

They will be welcomed into the flagship index before trading begins on Monday 19 September.

Not just prestige, but actual practical ramifications

So why is joining the ASX 200 such a boon for stocks?

That’s because passive funds that follow the index are forced to buy the shares, thereby pushing up demand.

And of course, the share price heads upward as demand increases.

This will be some relief for investors of insurance building repairer Johns Lyng. The price for that stock has dipped 15.5% over the last couple of weeks.

Shareholders for lithium producer Sayona Mining will be glad too, with that stock losing about a third of its value since 19 April.

Lovisa shares have gained a whopping 71% since mid-June, so the ASX 200 addition could light another fire under the rocket.

More to watch

Those three stocks aren’t the only ones entering the exclusive 200 club though.

Investors may keep an eye on these other companies to see how they might move as 19 September approaches:

• Capricorn Metals Ltd (ASX: CMM)
• Charter Hall Social Infrastructure REIT (ASX: CQE)
• Karoon Energy Ltd (ASX: KAR)
• Smartgroup Corporation Ltd (ASX: SIQ)
• Spark New Zealand Ltd (ASX: SPK)

Conversely, for each stock that’s added to the ASX 200, one gets removed.

And that’s potentially bad news for those companies, as passive funds that follow the index are forced to sell.

When supply increases, the share price dips.

So watch out if you’re holding any of these ASX shares, which will be kicked out of the ASX 200 on the morning of 19 September:

• Life360 Inc (ASX: 360)
• AVZ Minerals Limited (ASX: AVZ)
• City Chic Collective Ltd (ASX: CCX)
• Clinuvel Pharmaceuticals Limited (ASX: CUV)
• EML Payments Ltd (ASX: EML)
• Janus Henderson Group CDI (ASX: JHG)
• Pointsbet Holdings Ltd (ASX: PBH)
• Zip Co Ltd (ASX: ZIP)

The post Why these 3 ASX shares could be in for a massive boost this month appeared first on The Motley Fool Australia.

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More reading

• Zip shares on watch amid ASX 200 ousting
• 5 things to watch on the ASX 200 on Monday
• Zip and these shares have been kicked out of the ASX 200 index
• Here are the top 10 ASX 200 shares today
• Why Core Lithium, Mineral Resources, PointsBet, and Strike Energy are dropping

Motley Fool contributor Tony Yoo has positions in Johns Lyng Group Limited and Life360, Inc. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended EML Payments, Johns Lyng Group Limited, Life360, Inc., Pointsbet Holdings Ltd, and ZIPCOLTD FPO. The Motley Fool Australia has positions in and has recommended EML Payments and SMARTGROUP DEF SET. The Motley Fool Australia has recommended Johns Lyng Group Limited, Lovisa Holdings Ltd, and Pointsbet Holdings Ltd. 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 Fortescue Metals Group Limited (ASX: FMG) share price is starting the week deep in the red.

In morning trade, the iron ore giant’s shares are down 6% to $16.21.

This means the Fortescue share price is now down by 19% since the start of the year.

Why is the Fortescue share price crashing lower today?

Firstly, before you panic about the iron ore price, I can confirm that it has not collapsed. According to Metal Bulletin, it was down approximately 0.6% to US$95.00 a tonne on Friday night.

And while there are admittedly a number of bearish brokers out there, today’s decline by the Fortescue share price has nothing to do with them either.

Today’s weakness has been driven entirely by the company’s shares trading ex-dividend for its upcoming final dividend.

When a share goes ex-dividend it means that the rights to that dividend are now staying with the seller and will not transfer to the buyer. As a result, a company’s shares will usually fall in line with the dividend amount to reflect this.

The Fortescue dividend

A week ago, Fortescue released its full year results and reported record iron ore shipments of 189 million tonnes. However, due to a significant pullback in the price of the steel making ingredient and rising costs, the company’s revenue fell 22% to US$17,390 million and its net profit after tax dropped 40% to US$6,197 million.

In light of this and its Fortescue Future Industries expenditure plans, the company slashed its final dividend by 43% to a fully franked $1.21 per share.

Based on the Fortescue share price at the end of last week, this final dividend alone equated to a 7% dividend yield.

Is this a buying opportunity?

Unfortunately, as popular as Fortescue is with investors, I have only bad news in respect to broker recommendations.

The general consensus is that the Fortescue share price is overvalued and heading lower from here. Not a single broker in my circle has a buy rating on its shares.

Goldman Sachs, which has a sell rating on its shares, has suggested that fair value is all the way down at $12.10.

The post Why is the Fortescue share price sinking 6% today? appeared first on The Motley Fool Australia.

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More reading

• 5 things to watch on the ASX 200 on Monday
• What’s the outlook for Fortescue shares amid a struggling Chinese economy?
• Why are ASX 200 mining shares getting hammered on Friday?
• These ASX 200 shares are going ex-dividend on Monday
• ASX 200 shares declared $42b of dividends in August. Here’s how you can get a slice

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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Xero Limited (ASX: XRO) shares have performed strongly over the long term. In fact, in the past five years, the Xero share price has seen a 250% rise.

However, it has dropped 43% since the start of 2022. Still, I think there are a number of financial statistics that show why this drop in the Xero share price could be an attractive buying opportunity for the long term.

For readers who haven’t heard of Xero before, it’s an ASX tech share that provides accounting software for business owners, financial advisers, bookkeepers, and accountants.

Strong Xero financial stats

The company’s FY22 result, reported in May 2022, showed a number of impressive metrics.

For me, one of the key figures is the gross profit margin of 87.3% (which was up from 86% in FY21). Such a high margin means that a large majority of new revenue can turn into gross profit, which can then be used to spend on further growth initiatives like marketing or software development.

With revenue growing quickly, it also means the scale and gross profit of the business are growing strongly. FY22 operating revenue went up 29% to NZ$1.1 billion.

Not only is the number of subscribers increasing around the world – with a 19% rise in FY22 to 3.27 million – but the average revenue per user (ARPU) is increasing as well. FY22 ARPU went up 7% to NZ$31.36. Price increases in key markets can help Xero’s organic growth.

The total lifetime value of subscribers continues to increase. In FY22, it soared 43% to NZ$10.9 billion. This is being helped in a number of ways including new subscribers, higher ARPU, and increasing customer loyalty. The average customer lifetime is now 9.3 years. There is seemingly a lot of future revenue already signed up.

I think the extremely low churn rate is one of the best measures of the quality of Xero shares and also the quality software offering for its subscribers. In the second half of FY20, churn was just 1.13% of subscribers, which dropped to 1.01% in the second half of FY21 and 0.9% in the second half of FY22.

Management confident about the future

Xero says that it’s going to continue to reinvest its cash flow generated to drive long-term shareholder value.

The Xero CEO Steve Vamos said:

The value Xero brings to our small business customers and the trust they place in us is illustrated by this result. Our strong revenue and subscriber growth gives us confidence to continue to invest for growth consistent with our long-term strategy.

Our performance reflects the quality of our customer and partner relationships as more people realise the benefits that cloud accounting and digital tools provide.

We are committed to delivering the world’s most insightful and trusted small business platform by focusing on driving cloud accounting adoption, growing the small business platform and building for global scale and innovation. We continue to prioritise investment in building products and growing partnerships by investing cash generated to help deliver our strategy, drive long-term growth and meet customer needs.

Xero share price snapshot

Over the last month, Xero shares have fallen 14%.

The post Financial powerhouse: Why I think these stats make Xero shares irresistible appeared first on The Motley Fool Australia.

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More reading

• ASX 200 tech shares are getting hammered on Monday. Here’s why
• Up 20% in 2 months, is the Xero share price a buy today?
• Here’s what Goldman Sachs thinks of the Xero share price
• 5 things to watch on the ASX 200 on Friday
• Why Blackmores, Codan, Lake Resources, and Xero shares are falling today

Motley Fool contributor Tristan Harrison 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 Xero. The Motley Fool Australia has positions in and has recommended Xero. 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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Despite achieving the top end of its guidance for the 2022 financial year, the CSL Limited (ASX: CSL) share price has remained flat since the release of the results.

At last week’s market close, shares in the biotherapeutics giant finished at $295.99. This compares to the $296.40 they were trading at before reporting the company’s FY 2022 scorecard.

CSL CEO and managing director Paul Perreault acknowledged the resilient performance against the ongoing challenges of COVID-19, saying it was a ‘good result’.

Nonetheless, the board opted to maintain its final dividend of US$1.18 (AU$1.68) per share. Due to favourable currency movements, this translates to a lift of 9 cents or 5.6% over the prior corresponding period.

Investors were quick to react to the results, sending CSL shares to a monthly low of $278.89. But as the day went on, the share price mostly recovered to end at $292.50 – down 1.32%.

Let’s look at the details you need to know about the upcoming dividend.

Time is running out for the CSL dividend

Investors will have until the end of today to secure the CSL dividend.

The ex-dividend date falls on Tuesday 6 September.

This means if you buy the company’s shares before market close today and hold them until tomorrow morning, you’ll be eligible for the final dividend.

The dividend is also franked at 10% which equates to US 11.8 cents (AU 18 cents) per share.

Keep in mind though, when a company’s shares trade ex-dividend, the share price tends to fall in proportion to the dividend paid out. However, this can vary depending on how the market is tracking for the day, as well as investor sentiment.

If you do manage to scoop up some CSL shares, a dividend payment of roughly AU$1.68 per share will land in your bank account on 5 October.

The details of the exact payment currency equivalent will be released on 9 September.

How has the CSL share price performed in 2022?

At the start of 2022, the CSL share price nosedived 17% to hit a 52-week low of $240.10 in mid-February.

However, the share quickly rebounded and traded around $270 for several months.

When the new financial year kicked off, CSL shares rose and have been hovering under the $300 mark.

For the calendar year, the biotech’s share price is up 2%.

In comparison, the S&P/ASX 200 Health Care (ASX: XHJ) sector is down 5% over the same period.

CSL commands a market capitalisation of approximately $142.58 billion and has a dividend yield of 1.02%.

The post Want to snare the next CSL dividend? Read this appeared first on The Motley Fool Australia.

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More reading

• 5 ASX 200 shares turning ex-dividend tomorrow
• Why is the CSL share price outperforming the ASX 200 on Friday?
• ASX 200 shares declared $42b of dividends in August. Here’s how you can get a slice
• How do CSL shares stack up against Cochlear following earnings season?
• Top ASX shares to buy in September 2022

Motley Fool contributor Aaron Teboneras 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 CSL Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. 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.

As measured by Vanguard’s Total Stock Market Index ETF, the U.S .stock market currently sits around 19.4% below its recent highs. That’s still in the neighborhood of a bear market, and there are plenty of reasons to remain nervous. In particular, with the Federal Reserve making it clear it won’t stop raising interest rates until inflation is under control, the downward pressure on stocks may very well continue.

That raises a key question: Is it safe to invest in the stock market right now? Well, the direct answer to that question is no. Of course, it is never safe to invest in the stock market. Your money is always at risk in the market. As a result, a better question to ask is whether the falling market has opened up opportunities where the potential rewards are worth the risks you’re taking. Through that lens, there just might be a path to where it might make sense to consider investing again.

Look where the fear is palpable

In a rising rate environment, some of the industries that get hardest hit are the ones that rely heavily on customers that need to borrow money to make their purchases. For instance, the S&P Homebuilders Index is down far worse than the market as a whole as people worry that rising rates and a tougher economy will keep people from buying new homes.

While it is absolutely true that rising rates make it tougher for people to buy homes, it’s also true that permits to build new homes remain slightly stronger than they were this time last year. While homebuilding and home buying is decelerating, we’re also coming off what had been an incredible housing boom, and one where demand far outpaced supply.

There’s a wide gap between a tremendous boom and a complete collapse, and contrary to popular belief, people are still buying houses. It’s just not at as fast a rate as it was during the peak of the low-interest rate fueled real estate mania. The question you should really be asking yourself is whether the market’s palpable fear surrounding homebuilders has made at least some of them available at a bargain price.

On a related note, rising interest rates mean that companies that are in the business of lending money have the opportunity to earn more on their lending. For instance, even as consumers cost to borrow has gone up, the interest rates banks pay on savings remain stubbornly low. Even so-called “High yielding” savings accounts are barely paying above 2%, even as 30-year mortgage rates have climbed to around 5.66%. 

One key way that banks make their money is off the spread between the rate they pay to depositors and the rate they lend out to borrowers. The higher interest rates are, the larger the potential room in that spread, which could ultimately translate to higher earnings for them.

Of course, the risk is that if too many people default on their loans, banks won’t be able to collect enough from their lending to fully cover their costs. If the economy stays soft and job losses start to mount, that risk can become magnified. So while bank stocks are down, at least some of the worry is justified by the potential of things to go from bad to worse.

Are the risks and potential rewards in balance?

Neither homebuilders nor banks are risk-free investments, but both have generally seen their share prices fall as the market has started to recognize the risks that both industries face. As a result, investors buying today actually have a better potential reward profile for the risks they’re taking than those who bought earlier when prices are higher.

Has the balance tilted enough in investors favor to where they may be worth buying? That’s a little tougher to answer, but you can usually get in the ballpark. One great approach to do that is to use the discounted cash flow model to help you value any stocks you’re considering buying. With that model, you can get a good handle on both the cash you expect a company to generate and what that cash is worth to you.

If the stock price looks cheap relative to value suggested by the company’s cash-generating abilities, then the risk-reward balance may very well be in your favor. Even better, since you’ve built a model based on projections of the cash the company is expected to generate in the future, you can use that model to check up on the company as time progresses. That can help you keep an eye on any stocks you do buy to see if their businesses are truly worth holding on to.

Get started now

While down markets often provide chances to buy great companies at bargain prices, the market’s panic likely won’t last forever. Make today the day you start looking for bargains. Once you find them and buy them, have the patience to let the market work through the rest of its worries. Do that successfully, and you just might discover that while it’s not safe to invest in the stock market now, it may very well turn out to be profitable.

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

The post Down 19%, is it safe to invest in the stock market now? appeared first on The Motley Fool Australia.

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More reading

• Financial powerhouse: Why I think these stats make Xero shares irresistible
• Want to snare the next CSL dividend? Read this
• Why is this top broker tipping 27% upside for the ANZ share price?
• Why did the BHP share price smash the ASX 200 in August?
• 5 ASX 200 shares turning ex-dividend tomorrow

Chuck Saletta has no position in any of the stocks mentioned.  The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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

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