Let’s change things up a bit. Anything I buy now will be mentioned as a Teaser and you have to figure out what I bought based on the clues. You’ll get the idea...keep up. Careful with the clues – they’re really not as obvious as they appear.
In the writer's blog of 3 September 2015, the increased uncertainty concerning the outlook for the world's economic prospects and global profits - highlighted by the VIX indicator - together with the prime ‘bear’ case for equity markets was flagged. The article concluded with a rhetorical question: wondering if the current valuation of apparently robust businesses can prevail in a wider sell-off of stocks. In particular, if US equities fall (on a perceived overvaluation, compared to their longer term rating based on earnings multiple and asset backing), is it inevitable that thriving domestic businesses are similarly impacted?
Weakness in global commodity prices (take copper as an example, which has fallen 20% over the past four months) has typically been reflected and exacerbated (by operational and financial gearing) in the mineral extraction companies' share prices - like Rio Tinto falling from £29 to below £22 over that period. By contrast, the location-constrained price of UK land and houses has been resilient. This week has seen upmarket and London-focused Berkeley Group promoted into the FTSE100 (as the 83rd largest listed business), joining the stocks of volume national home builders Barratt Developments (no. 62), Persimmon (64th) and Taylor Wimpey (88th) in the index.
While short term traders might correctly consider that any stock offering big potential profits (on paper) cannot be immune from the wider market's retreat, longer term investors should re-assess retention by reconsidering the merits - and risks to - their individual industry and company-specific investments . Mindful that 'hopping off' out of a particular company share, or the wider market, will always leave the psychologically difficult consideration of when to re-enter (on the presumption that the individual deems equity investment suits their circumstances and objectives). And the very human risk of forgetting altogether.
So, taking a closer look at the UK home builders - which have bucked the overall market's performance - investors should remain vigilant to any deterioration in prospects for the industry. Amongst regular media dispatches on the subject, the following announcement from Mr Brandon Lewis, the housing minister, "that the government plan to see one million new homes built over this parliament" caught the writer's eye this week. In addition, the National Housing Federation’s statement that they had estimated 974,000 homes were required in the four years to 2014, but less than 458,000 were built according to data from 326 local councils. Elsewhere, in terms of pertinent news flow, HMRC advised that 106,480 homes changed hands in August (an 18 month high, but below the 149,000 transactions back in 2006), house prices nationally rose 5.2% over the year according to the Office of National Statistics and that 40% of homes were bought last year without recourse to a mortgage.
The following companies announced trading results today, and merit a brief mention for various reasons:
Empresaria, the international specialist staffing group, pleased the market when reporting a 33% increase in pre-tax profits to £2.7m and a 45% hike in earnings per share to 3.2p. This arose despite a currency translation hit (notably Euro weakness versus sterling) and an absence of top line growth. A reorganisation of its portfolio of overseas offices over the past 18 months - which saw closures of its relatively small operations in the Czech Republic, Slovakia and Malaysia - has improved the group's exposure to regions and areas of business offering higher growth. The latter include opening in Dubai, and good performances in IT digital & design in Australia, executive search in Thailand and offshore recruitment in India.
Ahead of probable additional bolt-on acquisitions, the balance sheet appears strong and market conditions are described as "favourable, although the economic situation in South East Asia could lead to a slowdown in that region". Management expressed confidence that full year results will be ahead of current market expectations, prompting a 15% rise in the share price today. At 82.5p, the shares have doubled since the writer flagged the stock as one to follow at the beginning of the year. One to hold for the longer term, with an industry consolidator probably having to pay £1+ to have any prospect of success.
Fairpoint Another stock mentioned in the 15 January '15 blog was this unfashionable debt solutions and consumer legal services business. Again growing via selective purchases of solicitors and similar firms, profits in the first half of 2015 exceeded expectations with earnings per share rising 19% to 7.38p. Strong cash generation has seen net debt fall to £5.2m, with funding available to facilitate further expansion. Since the half year end, Fairpoint have completed a £9m acquisition of a consumer professional services business Colemans, which will add £19m in annualised revenue and specialises in volume personal injury claims, volume conveyancing and travel law. Panmure Gordon have been appointed today as joint (with Shore) broker to aid expansion efforts.
The prime attraction of this stock is its valuation, as well as potential to build a business via immediately earnings-enhancing 'bolt-ons'. Fairpoint shares have progressed from 113p in mid January to a new all-time high (up 4p today) of 175p, but they remain on a single digit multiple of 9.3 times forecast earnings for the full year. With EPS of 20p likely for calendar 2016 the stock is on a lowly multiple of 8.6, with a 7.1pence dividend forecast to provide an appealing 4.5% yield.
Elsewhere today, the writer was reassured by positive trading updates from two other growth businesses, which this blog has previously commented upon (in favourable terms): budget airline easyJet and Redde. The latter provides accident management and legal services, typically working with insurance companies, brokers and motor dealerships. Both appear well positioned to make further progress in the coming year, with low oil prices set to aid the airline's efforts to keep a lid on its costs and Redde having made a substantial £43.2m acquisition of a complimentary fleet accident management business, FMG, in August.
easyJet stock rose 6% today to reach 1771p, a fair price given likely 142p of earnings in the year to 30 September 2016 equating to a market average PE of 11.8 times. Investors will be hoping for higher dividend payouts over the next few years, as the business becomes more mature and profit quality (which equates to reliability) improves.
Redde shares have trebled, in a near straight line trend, over the past year as brokers have issued regular earnings upgrades - the prime fundamental driver of share prices, incidentally. In the following year to 30 June 2016, EPS of 9p is predicted putting the stock on a rather demanding earnings multiple of 17.6 times. The recent growth record means that a premium rating is deserved, but taking a partial profit after such a strong run - "leaving something for the next investor" - makes sense. Meantime the high dividend yield (almost all profits are returned to shareholders), of 5.2% currently, make this a favourite within tax wrappers such as ISAs and SIPPs.
The old adage implying that there will be both buyers and sellers in a healthy market – if only to determine the price – comes to mind following the turbulence seen in global stock markets over the past fortnight or so. Call them ‘bulls’ and ‘bears’, or optimists and pessimists, but there have undoubtedly been some very strong two-way pulls in equity valuations. Essentially as investors try to assess what’s ‘in the offing’, insofar as the world’s economic landscape is concerned – as suggested in this writer’s Blog of 24 August 2015 entitled ‘A critical week ahead’. The catalyst for this reappraisal was a deterioration in manufacturing data emanating from the world’s second largest economy, accompanied by unexpected devaluations in the Chinese currency and a sense of “Where else, beyond China, can the world’s growth come from?”
When constructing a portfolio of company shares, it is important to include some businesses exposed to positive momentum or growth. Even the most value-oriented, pessimistic or defensively minded investors should be able to point to company stocks which offer the potential of growth; be it from cost-reduction in a mature industry to some other transformation. Neil Woodford is a fund manager who takes a cautious view of the world (his core fund has a clear bias towards pharmaceuticals, tobacco and other less-economically sensitive business activities), but amongst the high dividend paying 'blue chips' in his portfolio, he also has room for a tail of 'jam tomorrow' (as yet unprofitable), stock exchange listed and unlisted firms. Principally featuring biotech, information technology and other new idea businesses, many of these companies began life within prominent British or overseas universities, and have required venture capital or other forms of funding to move a product from development within a scientific laboratory to application within the real world.
In blogs of the 13th and the 31st of July, the growth potential offered by the likes of Telit Communications and Stadium Group were highlighted, in the context of fast developing M2M (machine-to-machine) wireless connectivity which is progressing from the world of commerce to devices within the home being controlled remotely.
Another new technology-driven business trend, which could prove worthy of further investigation, surrounds marketing opportunities offered by online-driven publishing and other media. Increasingly, consumers investigate, sift through information and then shop online. Most obviously using websites that specialise in introducing consumers to the product or service they seek, who take an introductory commission and often an ongoing share of recurring revenue in respect of that client from the end destination retail or other organisation (akin to QuidCo), part of which they may rebate back to the consumer.
An Israeli-originated business, like Telit, with strong links to the Technion (Israel's Institute of Technology), XL Media has an interesting business model featuring revenue-sharing and a strategy of paying a high proportion of earnings to shareholders. The company owns 2,000+ websites in 18 languages, and its optimisation capability allied to their information-rich content attracts high rankings on search engines. XL Media also specialises in media buying (producing detail-focused online advertising campaigns) to support their own websites as well as constructing them for other operators. Clever technology to assess the right price of search, track the detail of fulfilment, accessing social media and in particular using mobile sites, sometimes outsides its core business in conjunction with a corporate affiliate or partnership program, has resulted in maximising returns and delivering impressive financial results.
XL Media came to the Alternative Investment Market (AIM) eighteen months ago, beginning life at 65p per share, with 48% of stock in free hands. In the five years to 31 December 2014, turnover has grown from US$11.2m to $50.7m and pre-tax profits has grown from $3.9m to $13.2m. Based on last month's positive trading update on the first half of 2015 - indicating revenue of $36.4m+ and EBITDA of at least $12m - growth rates on the comparable period of 2014 are in excess of 83%. Broker forecasts are difficult to find, but the consensus (includes 'shop' broker Cenkos) anticipate earnings per share of 5.94pence and a dividend of 2.7p for the current full year, with EPS of 7.65p and a dividend of 3.27p forecast in 2016.
The online publishing media and digital marketing services industry is very much a global and a fragmented (i.e. no dominant leader) one. The need to maintain an innovative cutting edge is paramount, requiring ongoing quality R&D which can be expensive. XL Media plan to make earnings and proposition enhancing acquisitions as a means of supplementing organic growth. On 26 May, management announced a purchase of UK-focused mobile targeted websites and, on 16 June, paid $7.36m for a majority stake in another Tel Aviv-domiciled performance marketeer with mobile capabilities and extends industry sector reach (beyond gaming) and in to the US and Europe.
The CEO owns 4.8% of this £139m market cap business, with leading domestic fund managers also evidencing confidence in the group's prospects; notably Investec with a 5.5% stake, Hargreave Hale 5.3%, Slater Investments 5.0%, River & Mercantile 4.8% and Inflection Point Investments 3.3%. Private clients must do their own diligence and research, but the way in which new technology is changing the way companies and consumers do business is increasingly obvious. How firms attract new clients' business and - by reference to XL Media's 'raison d'être' - reward the introducers or agents is certainly changing too in the new digital age. Many of these businesses will necessarily be young and often AIM listed (lack a track record and credible governance), growth-oriented and unprofitable (having to reinvest much or all of profit back into developing their technology and market share). Essentially they are higher risk, in the hope of achieving higher eventual reward, but XL Media's policy of distributing profits sooner rather than later has compensatory and stock supportive attractions. That income, worth 4% on the current 69p share price (above the UK stock market's average dividend yield) likely to result from the current year's earnings, could rise to 5% based on projected 28% growth in 2016. A little bit of spice in an ISA perhaps, but until corporate disclosure moves beyond its existing AIM level, not suitable for 'widows or orphans'
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