"When stocks go down and you can get more of them for your money, people don't like them anymore." Warren Buffet.
What Buffet was getting at in this quote is that whilst people are willing to pay for a stock at say $2 they are unwilling to buy them when they fall to $1, even though you can get more of them for the same amount.
That's not to say that you should double down on any stock because the price halves. However, if the fundamentals remain in tact and you are paying a price significantly below intrinsic value, then why wouldn't you buy more? That is at least my rationale for purchasing another 10,000 REF shares today for $0.98.
I first purchased REF shares back in February at $2.22, at that time I was a little overly optimistic about earnings growth. Not because I thought the business would do better but I didn't anticipate the strong AUD which affected REF's GBP profits, from which they derive the bulk of their earnings. That exchange rate has improved in 1H09 to an average of0.454 as opposed to an average of 0.468 in 2H08. However it is still above the average for FY08.
Consensus earnings estimates are forecasting a decline of about -7.1% for FY09 and a cut in the dividend from $0.24 to $0.21. No, that is not a misprint, the stock is currently $0.96 and is forecast to deliver a FY09 dividend of $0.21 cps, for a dividend yield of almost 22%.
Using the consensus number, I value the stock at around $1.80 - $1.90. Remember this company has a return on equity in excess of 200%, has no debt and generates a trememdous amount of free cashflow which they pay out as dividends.
Of course, the effect of the current economic malaise is as yet unknown, however even if the company were to slash their dividend by a third from last year's level, at current prices you would still be receiving a 16% dividend yield. If earnings and divdends were halved, a scenario I think is very unlikely, you would still be getting a 12% yield. That's much better than I can currently get in the bank and thus an offer I can't refuse.