Newsletter No. 10 02/06/2017

Good Afternoon,

The UK

So far this week the FTSE 100 has risen to around 7580; Sentiment has been affected by both the weak pound and the upcoming General Election. GBP found itself as one of the worst performing major currencies on Wednesday, down as much as 0.6 per cent overnight in Asia. The fall was incited by the release of a YouGov poll which showed Prime Minister Theresa May’s Conservative party could lose 20 seats on June the 8th and Jeremy Corbyn’s Labour party could pick up 30 seats, leaving neither side able to claim a majority victory.

UK Food Retailers

Boosted by an acceleration in grocery price inflation, Morrisons and Tesco led the way as supermarkets enjoyed their strongest period of trading in over three and a half years. Established groups and emerging discounters all performed fantastically in the 12 weeks ending 21 May 2017, in that time data shows that inflation rose by 2.9% and overall sector sales by 3.8% year on year, the best performance since September 2013.

Sales at Tesco climbed 1.8% year on year, Sainsbury’s by 1.7%, Asda’s by 0.9% and Morrisons by 1.9%.

My recommendations from the above are Morrisions Plc and Sainsbury’s Plc. Morrison’s; I believe there is a lot of potential for growth following the tie-up with Amazon last year and the extra utilisation of its in house manufacturing facilities. Sainsbury’s; yielding around 4% and trading on a P/E of 16 is a good addition to any income orientated portfolio.

The below chart highlights UK food inflation.

 

 

united-kingdom-food-inflation

 

USA

The US showed signs it was leaving behind a soft start to 2017 as new data revealed consumer spending grew at its quickest pace of the year in April, suggesting the world’s biggest economy was shrugging off political turmoil and was again poised to lead a global recovery. Consumer spending is the key driver of the US economy, a slowdown earlier in the year held gross domestic product growth to an annual pace of just 1.2% in the first quarter. Earlier this week the Atlanta Fed said the stronger data helped its closely-followed GDP tracker to project second-quarter growth of a robust 3.8%.

 

Basic share analysis

Sometimes in my newsletters I mention the different forms of analysis I use. I don’t think twice about explaining the meanings as its second nature to me. However, I thought it might be a good idea if each week I include a small section on commonly used terminology/analytical tools to help you better understand the stock market. I will delve a little deeper each week so hopefully everyone can pick something up.

There are two forms of share analysis;

Fundamental analysis determines the health and performance of an underlying company by looking at key numbers and economic indicators. Technical analysis assumes that a security’s price already reflects all publicly-available information and instead focuses on the statistical analysis of price movements.

So to start off with let’s look at Price / Earnings ratio (PE ratio for short) which is a form of fundamental analysis.

Introduction to Price Earnings ratio: PE ratio is one of the most widely used tools for stock selection. It is calculated by dividing the current market price of the stock by its earning per share (EPS). It shows the sum of money you are ready to pay for each £ worth of the companies’ earnings.

For example, suppose that a company is currently trading at £40 a share and its earnings over the last 12 months were £2.00 per share. The P/E ratio for the stock could then be calculated as 40/2, or 20.

As a rule of thumb a high PE points to a high growth company as the valuation is pricing in future earnings per share growth. If the company/sector is not expecting a high growth rate then the PE can help you spot something that is “expensive”.

This works with low PE too, in general a low PE points to low growth as you don’t want to pay over the odds for earnings that are not expected to increase all that much, however a low PE can help you pick out a bargain.

PE ratios are best looked at sector by sector as cross sector analysis can be misleading due to external economic factors.

 

 

Recommendations

 

Johnson Matthey

Johnson Matthey is a British multinational speciality chemicals and sustainable technologies company headquartered in the United Kingdom, they are the world’s largest manufacturer of catalytic converters. In recent results the company announced sales excluding precious metals (a measure which strips out fluctuating commodities prices) rose by 13 per cent to £3.5bn in 2017. When the currency effects are removed, sales grew by 6 per cent and underlying operating profit by 4 per cent. The company expects this level of sales growth to continue in the coming year and also announced a 5 per cent increase in its ordinary dividend, now paying 75 pence per share or 2.3%. JMAT is currently trading around the £31 mark, quite a way off its year high of £35.40. Although some may feel the company will be left behind by electric vehicles I would argue it will be a considerable period of time before electric accounts for a substantial part of the market. A figure to think about is that in China there is still only 1 car per 6.75 people.

 

 

Caledonia Investments 

At a time when discounts across the investment trust sector are at historically low levels, we believe that Caledonia Investments’ current discount of 17% is difficult to justify. While clearly not a mainstream global equity portfolio, we believe its long-term performance record and progress made under the stewardship of Will Wyatt and Stephen King justify a considerably tighter rating. While there has been increasing criticism of the short-termism of the investment management industry, Caledonia has a genuinely long-term mind set. We believe that this is highly attractive and that its ability to invest widely in both quoted and unquoted investments will lead to strong absolute returns over the long-term. The decision to pay a 100p special dividend represents efficient capital management, in our opinion, and reflects both the success of the investment in Park Holidays and the cautious outlook on markets and valuations at present. We have sometimes described Caledonia Investments as a ‘bottom drawer’ investment.

 

 

Burford Capital 5% 2026 

Yes I am still talking about this (3rd newsletter in a row) but the new Burford Capital 5% 2026 bond looks attractive compared several of the bonds in issue. There are still several corporate bonds I would suggest swapping into the Burford Capital 5% 2026 (which is now live and trading around 102 in the market) to achieve a pickup in yield.

Corporate bonds can often be seen as a buy & hold investment. This is not the case, unlike your high street banks fixed term bonds, corporate bonds can be traded and should be if an opportunity arises to increase your yield whilst maintaining a similar exposure to risk. When a bond’s price increases the yield to maturity drops, this is due to the fact that the bond has to revert to 100 up on redemption.

 

Below is a list of bonds you may want to consider switching;

 

ALPHA PLUS HOLDINGS PLC 5.750% 18/12/2019 3.498%

CLS HOLDINGS PLC 5.500% 31/12/2019 3.435%

PROVIDENT FINANCIAL PLC 7.000% 14/04/2020 1.828%

TESCO PERSONAL FINANCE 5.000% 21/11/2020 3.057%

TESCO PERSONAL FINANCE 5.200% 24/08/2018 1.884%

WORKSPACE GROUP PLC 6.000% 09/10/2019 2.829%

 

Thanks for taking the time to read my newsletter!

 

Enjoy your weekend,

 

Karl Townsend ACSI

Stockbroker

For and on behalf of

Arnold Stansby & Co Limited

Telephone: 0161 832 8554   Fax: 0161 834 7710

Members of the Stock Exchange

Authorised & Regulated by the Financial Conduct Authority

 

 

A word about some risks: Investing in the bond market is subject to certain risks that fixed income securities will decline in value because of changes in interest rates, and the risk that the manager’s investment decisions might not produce the desired results. Bonds with longer durations tend to be more sensitive and more volatile than securities with shorter durations; bond prices generally fall as interest rates rise. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Derivatives may involve certain costs and risks such as liquidity, interest rates, market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested. Equities may decline in value due to both real and perceived general market, economic, and industry conditions. Diversification does not ensure against loss.

There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors, and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market.

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The contents should be used as guidance and not investment advice, for advice that is specific to your risk profile and investment goals speak to us directly.

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