Although volatility can be unnerving for even the most seasoned fund managers, dramatic swings in share prices does do one thing for investors – present them with opportunities.
The experience of seeing share prices crash is rarely enjoyable. However, it can result in high-quality companies trading at very attractive valuations.
We have selected three FTSE 350 companies that stand out as shares that should be considered by long-term investors after the recent global equity sell-off.
Rio Tinto
Rio Tinto’s exposure to China should come with its own risk warning. The company is heavily dependent on China’s demand for natural resources, and the slowdown in China’s growth rate has been particularly unhelpful.
That said, with shares now back beneath the 5,000p mark, the risk/reward ratio warrants consideration. Despite all the doom and gloom surrounding China in the first half of the year, Rio Tinto managed to increase underlying EBITDA by 3% demonstrating a prudently run operation able to withstand external headwinds.
Mining is a horribly cyclical pursuit. The industry is dictated by long, drawn-out periods of expansion and contraction driven by underlying commodity prices and the wider macroeconomic environment. Iron ore prices have been in a downtrend since their 2021 highs and are currently residing near the lower end of the trading range. Copper is stronger than it has been historically but is well off the most recent highs.
Lower prices are themselves not a precursor for a rise, although they do reflect negative sentiment that is unlikely to get dramatically worse.
The recent declines in metal prices have created an interesting set-up for investors looking to enter Rio Tinto, and the sell-off earlier this week made it all the more interesting.
Legal & General
Legal & General is a FTSE 100 dividend heavyweight, and the company’s half-year results released this week solidified the reliable nature of the group’s cashflows.
“There are a lot of strings to L&G’s bow, with bulk annuities at its core, and the market looks like it’ll stay healthy over the medium term,” explained Matt Britzman, senior equity analyst, Hargreaves Lansdown, in response to L&G half-year results.
“The next challenge is to deliver improved performance from the refreshed Asset Management division, which will carry some execution risk. There’s plenty to like here; the balance sheet is strong, and total returns to shareholders are attractive with a growing dividend and ongoing buybacks too.”
Shares in the life insurance and asset management company came under pressure earlier this year after it outlined mediocre dividend growth plans at a capital market event earlier this year. Legal & General shares are yet to recover, and this week’s volatility has brought the stock within touching distance of 200p.
As Britzman highlights, the dividend plans aren’t bad – they just didn’t blow investors away. More importantly, the dividend is well covered by earnings, and investors needn’t be overly concerned about any threat of a cut to the dividend’s current 9% yield.
Next Energy Solar Fund
Just as the Next Energy Solar Fund was starting to build momentum, the recent came along and knocked it off track. This will be frustrating for existing investors, but it gives those looking for an entry an opportunity.
The Next Energy Solar Fund is an FTSE 250-listed Investment Trust with a portfolio of solar assets, primarily in the UK. The management team and assets play a major part in the UK’s solar power generation, with installations throughout the country, including the 9MW capacity Gover Farm installation in Cornwall and the 4.8MW capacity Balhearty asset in Scotland.
The trust has 103 assets in total, 92 directly owned in the UK and 8 in Italy. It also has co-investments in Portugal and Spain.
Next Energy Solar Fund, like almost all clean energy infrastructure investment trusts, was a victim of the global interest rate tightening cycle and will likely be a beneficiary from the easing cycle. Higher interest rates raised questions about the valuation of privately held assets, and share prices suffered as a result. However, there is a clear disconnect between this trust’s NAV – which undergoes rigorous third-party assessment – and the share price.
The trust is targeting dividend payouts of 8.43p for 2024/25. This translate to a forecast yield of just over 10% with shares at 82p.