Brokers label PR and advertising giant WPP a ‘buy’

Otmane El Rhazi from Mindful Money » Shares.

Brokers are putting their cash behind advertising and public relations giant WPP as its shares continue to rally.

The FTSE 100 constituent is typically regarded as the bellwether of the advertising industry and therefore something of a global economic barometer.

The past three months alone have seen the firm’s shares rise by 21% while the present analyst consensus has the stock in ‘strong buy’ territory.

For his part Graham Spooner, investment research analyst at The Share Centre, is recommending WPP as a ‘buy’ for long term investors with a balanced portfolio.

He says: “The company offers a wide range of exposure to both digital media and global markets, and has seen its share price rally since October. The growing importance of emerging markets and digital media to the company looks set to continue, allied to improving dividends, earnings momentum and a steady flow of acquisitions.”

Despite a trading update in October, which cautioned that clients remained cautious over the group’s advertising spend, like for like sales rose by 3% in the third quarter.

But the recent strength in the dollar in conjunction with the weakness of the pound could see the group’s earnings receive a boost in 2015 asserts Spooner.

He says: “New technology should help open up avenues for growth for the group over the longer term. This is reflected in new media related business becoming WPP’s fastest growing area. Currently the shares trade on around 14.6 times 2015 forecast earnings, which does not appear overly expensive.”

Strong dollar and weak oil price likely to boost Europe’s corporate profits

Otmane El Rhazi from Mindful Money » Shares.

The strong rise in the US dollar and the fall in the oil price are likely to provide a boost to corporate profits in Europe and Japan this year asserts Carlo Capaul, head of global equities at Swiss & Global Asset Management. He explains why…

In both regions, profits are likely to exceed expectations, while there could be disappointments in the USA.

However, there is limited room for dividend increases in regions where the strong US dollar and the low oil price are causing problems, for example emerging markets such as Brazil, Russia or Malaysia.

The individual business models of companies, as well as the climate in their specific industries are key considerations for investors in these markets. This also applies to countries such as France or Italy which are struggling with economic problems.

For certain euro countries the framework conditions are indeed difficult; however, this does not mean that companies in these countries – in particular outside the finance sector – should be avoided. Many European companies operate globally and achieve only a small share of their sales in their home countries. Russia should however be approached with caution. Given the political and economic conditions, it will remain an unattractive environment for dividend investors in 2015.

This year, global dividend volume will grow by a single-figure percentage. The most important influencing factor will be corporate profits, as the global backdrop is unlikely to change much, even if the US Fed becomes the first leading central bank to introduce a more moderate monetary policy during the year. We expect real economic growth of 2.3 percent and nominal economic growth of 4.1 percent in industrial countries (measured in US dollars), and nominal growth of 11 per cent in emerging markets.

Non-index-oriented investors will likely shift part of their commitments to favourable markets such as the eurozone, Japan, China, Thailand, Taiwan and Turkey, in attractive sectors such as industrials, telecommunications and non-basic consumer goods.

Brokers calling Taylor Wimpey a ‘buy’ as the house builder enters 2015 with record order book

Otmane El Rhazi from Mindful Money » Shares.

A flurry of analysts have thrown their support behind house builder Taylor Wimpey which has declared it has started 2015 in an “excellent position.”

The UK-based firm, which has with subsidiaries in North America and Spain, in its trading update today announced that total completions for 2014 rose by 6% with average prices rising by 12% to £213,000 and that the company has entered 2015 with a record order book worth almost £1.4bn.

As a result brokers at JP Morgan Casenove, Citigroup, Deutsche and Liberium Capital have all issued positive notes on the firm leaving the shares, which are up 4% over one year and by 14% over the past three months, in “strong buy” territory according to Digital Look.

In statement Taylor Wimpey chief executive Pete Redfern, commented: “Taylor Wimpey starts the year in an excellent position and whilst the global economic outlook is uncertain, in the UK we have an environment of sensible mortgage regulation and a reduced risk of UK interest rate increases in the near term.“

Brokers at The Share Centre are also backing the stock. Helal Miah, investment research analyst at firm said ” It believes it is currently at its optimal size in terms of the amount of plots it has acquired and owns. Furthermore, the group expects to improve the operation margin by 400 basis points and currently sit on a cash balance of £113m.

“Although 2015 may not be as successful as 2014, we recommend Taylor Wimpey as a ‘buy’ for medium risk investors. The expectation of a moderation in the housing market should lead to a more sustainable growth rate, which will still be supported by government policies and the demand for housing.”

Tesco unveils massive cost-cutting plans as it gears up to close 43 stores and final salary pension scheme

Otmane El Rhazi from Mindful Money » Shares.

Embattled supermarket group Tesco is to shut 43 “unprofitable stores” and will not pay a final dividend for 2014/15.

In addition it is closing its generous defined benefit, or final salary pension scheme, and closing its headquarters in Cheshunt in 2016. It will instead make Welwyn Garden City the UK and group centre.

The firm is also scrapping plans to open 49 more stores. The market welcomed the news as shares in the firm jumped by 7%, or 13.32p to 195.32p by 9:32am.

The dramatic cutbacks come on the back of a tumultuous period for the firm which has seen it issue a number of profit warnings.

Last year it was revealed that the retailer had over-stated profits by £263m, prompting the launch of an investigation by the Serious Fraud Office and the suspension of a number of senior executives.

In the retailing giant’s latest trading statement, it reported that like-for-like sales fell back by just 0.3% during the six-week Christmas period and by 2.9% for the 19 weeks to January 3. The group’s new chief executive Dave Lewis who took over in September last year said the business has some “very difficult changes to make”.

He added: “I am very conscious that the consequences of these changes are significant for all stakeholders in our business but we are facing the reality of the situation.

“Our recent performance gives us confidence that when we pull together and put the customer first we can deliver the right results.”

It has also agreed a deal to sell its online streaming service Blinkbox and Tesco Broadband to TalkTalk.

Man Group’s turnaround in fortunes sees it hit The Share Centre’s ‘buy’ list

Otmane El Rhazi from Mindful Money » Shares.

The Share Centre has added hedge fund giant Man Group to its ‘buy’ list as better investment performance has resulted in increases in funds under management.

The stockbroker believes earnings at the group, which has endured a turbulent period over recent years, should recover well soon boosted by investor sentiment. The past 12 months alone has seen the FTSE 250 constituent’s stock jump by 91%.

Man Group was regarded as a bellwether for the hedge fund industry but the extreme volatility caused by the financial crisis led to a number of its funds to perform very poorly.

Looking ahead, Helal Miah, investment research analyst at The Share Centre, said: “We believe the long awaited turnaround in the fortunes of this business has begun and the shares have been creeping upwards on the more positive sentiment. Recent trading updates have shown positive signs with interim results in August reporting a 7% increase in funds under management.”

Furthermore, Miah highlighted that a trading update in October reported a 25% rise in third quarter funds under management to $72bn.

“While most of these are as a result of acquisitions, some of the key funds have demonstrated an increase in funds under management on the back of better investment performance,” he added.

“The shares are still a long way off from the time when hedge funds were sought after investments and the recovery in investor sentiment may be slow. The shares trade at roughly 17 times forward earnings, slightly above other big asset managers, however we believe the earnings should recover well soon.”

Brokers tip Dixons Carphone as one of 2015′s potential winners

Otmane El Rhazi from Mindful Money » Shares.

Brokers are tipping retailing giant Dixons Carphone as a potential winning share in 2015.

In August last year Dixons and Carphone Warehouse merged, and the newly created firm’s stock has been on the up, rising 42% share in the past six months and by 25% over three. Analysts are optimistic for further gains as the market consensus has the shares firmly labeled a ‘buy’ according to Digital Look.

December witnessed Citigroup, Deutsche and Investec Securities all reiterate positive recommendations on the Currys and PC World owner, while Ian Forrest, investment research analyst at brokerage The Share Centre, is calling Dixons Carphone his share of the week.

Forrest highlighted the stock’s 2015 price/earnings ratio of 20.5, which is described as “relatively high for the sector, but that reflects the strong earnings and dividend growth forecast by analysts for the next few years”.

He said: “Dixons Carphone has been added to our ‘buy’ list due to the company’s good performance since the merger. The first interim results from the combined group were very impressive and showed like-for-like sales growth. The 11% rise in the UK and Ireland was described as “barnstorming” by the chief executive, who added that he is comfortable with market expectations ahead of the crucial Christmas trading period.

“The scale and scope of the group’s consumer electronic products makes it ideally placed to benefit from the recent steady rise in consumer sentiment in the UK. As wages begin to outpace inflation and employment levels increase, the group looks set to benefit. Analysts have been raising their expectations rapidly since the merger and with the company outperforming, this trend may well continue. The attractive share price is based on strong sales growth, the potential boost to retailers from the fall in the oil price and the benefits of scale provided by the merger.”

Will 2015 see Lloyds return to the dividend list?

Otmane El Rhazi from Mindful Money » Shares.

Steve Clayton of fund and stockbroker Hargreaves Lansdown anticipates that 2015 will be the year when Lloyds Banking Group makes a decisive return to the dividend list, having been absent since mid-2008. He explains why…

Most analysts are predicting a token payment will be declared for the current financial year, but next year they see the dividend stepping up to meaningful levels. Consensus has Lloyds paying 1.1p for 2014, 2.9p for 2015 and then 4.1p in 2016. If those analysts are on the money, Lloyds would yield over 5% in 2016 if the share price were to remain at the current 78p.

The average dividend forecast of the nine analysts that have made a prediction for 2017 is 5.3p per share, which, if it happens, will be a yield of 6.7% on stock bought at the current price.

In a SIPP, or an ISA, there would be no further tax to pay. All this is far from assured, and indeed some analysts are predicting no dividend for next year. Nevertheless I believe 2015 will be the year it becomes clear whether Lloyds can become the cash-cow management envisage.

Let’s look at where we are now. Ever since the financial crisis, Lloyds has been either in theatre, or in the recovery suite. Their recent Strategy Day revealed a bank that was off the respirator, only making occasional use of walking aids and frankly now just waiting for the consultant to come around and say they were good to go home.

Take the balance sheet for example. The volume of impaired loans has more than halved to 4.5% of the value of closing advances, since 2011, whilst the amount set aside to cover any unrecoverable part of these loans has risen from 47% to 57% of their value. Given how much of Lloyds’ lending is secured, that looks like a conservative level of provisioning.

The loan book is behaving itself quite nicely these days; Lloyds view of a typical year sees a charge of circa 0.4% of the overall loan book to be taken against bad debt. This level of impairment hasn’t been seen since the middle of last year and the last few quarters have seen bad debts costing more like 0.2% per annum.

Underlying profits in the first nine months were up 35% to £6.0bn and cash costs were down usefully. Equity on the balance sheet, in other words the reserves available to cover bad news at shareholders’ expense, is up to 12% of Risk Weighted Assets, comfortably in excess of regulatory requirements.

Lloyds’ vision of the future is to be a large, but simple bank providing everyday banking services to predominantly UK citizens and businesses. The problem is that the market for those services is pretty well supplied, so growth will be linked as much to wider economic growth as it is to Lloyds’ attempts to snaffle market share from its rivals. The flip side is, that if the business is broadly plain vanilla stuff, largely conducted close to home with customers the bank already knows, then the risks for the business could be more manageable.

In the Bank of England’s Stress Tests, Lloyds was found to have sufficient capital to hopefully withstand a Doomsday scenario of sharply rising unemployment, inflation, interest rates and collapsing house prices and stock markets; a sort of Greatest Hits of the last three decades’ economic traumas. However, the pass was narrower than one might have hoped for, but as the Bank acknowledged, the Dec 2013 starting position used for the exercise took no account for the profits retained since then, nor the ongoing work to reduce riskier assets within the business, and so Lloyds was deemed to be fit for purpose, with no special measures required to be taken to further lift capital reserves.

This means, fingers crossed, that a decent share of the profits could be returned to shareholders as dividends, given the starting point of Core Tier One capital of 12%. And that is why I think Lloyds might surprise on the upside this year.

The way the economy is behaving, the business could prove robust and those future dividends should start to feel more and more tangible to the market. If the market starts to believe that the sort of payment some analysts are suggesting for 2017 is really a possibility, then income-seekers could come flocking. However, the emphasis needs to be on the longer term and, as with all dividends, these are variable and not guaranteed.

Nothing is without risk – PPI redress costs spring to mind here – and an election bring further uncertainty. But I think that a simpler, less risky Lloyds, run for the long term, could be a really interesting income proposition for the next few years.

Royal Mail sell-off underpriced by £180m

Otmane El Rhazi from Mindful Money » Shares.

The government’s privatisation of Royal Mail could have made an extra £180m, a report commissioned by Business Secretary Vince Cable has claimed.

The report led by former City minister Lord Myners concluded that the shares could have been valued up to 360p, 30p more than the flotation price, on the back of the high demand for the stock. The analysis however did go on to caution that if the £2bn initial public offering (IPO) price had been higher, it would have meant taking on “substantial” risk.

MPs have previously forecast that taxpayers lost out some £1bn in the 2013 privatisation.

Speaking on BBC Breakfast, Lord Myners said it was a “complicated transaction” and that “if any money had been left on the table it was pretty small”.

The report states while that a higher price could have been achieved it added that “the consensus appears to be that this was the order of 20p-30p per share… equating to proceeds to government at IPO of £120-180m”.

It adds: “For the avoidance of doubt, we do not believe that a price anywhere near the levels seen in the aftermarket could have been achieved at listing.

The value of Royal Mail shares surged went they hit the stockmarket in October 2013, rising by no less than 38%. As of 9:15 today, the shares in the FTSE 100 listed firm are trading at 398.7p, some 21% above their initial listing cost.

Gluttons for punishment – the only fun bit about value investing is the potential return

Otmane El Rhazi from Mindful Money » Shares.

Why would anybody want to be a value investor? It is a difficult, grim and – almost by definition – lonely existence. Take a glamorous area of investing such as personal computers and where are the value investors asks The Value Perspective’s columnist Kevin Murphy…

Are we piling into Arm Holdings because tablets are growing exponentially? No, we are buying the undervalued manufacturers of hard-drives and printers, which tablets barely use.

Clearly we are gluttons for punishment so you would imagine we must have a very good reason for pursuing a value strategy – and you would imagine right. It is effective. It works. From time to time, here on The Value Perspective, we mention our long-standing hunt for any academic study – carried out at any time, anywhere in the world – that has shown otherwise. We are still hunting.

When such academic studies examine the benefits of value investment, they tend to isolate more lowly valued stocks by concentrating on the cheapest half or perhaps the cheapest quartile or quintile of a particular market. That is, however, likely to be a lot of companies so that, for example, if you were looking at US data going all the way back to 1951, the cheapest quintile would number 170 stocks.

We know this because we asked our friends at Empirical Partners to crunch some numbers on precisely that data to see what lessons might be learned from the distribution of returns. No private investor, after all, is going to buy the best part of 200 stocks so what if we reduced the number to something a bit more manageable, such as 40?

Using that US data covering the period from 1951 to 2014, Empirical Partners isolated the 170 companies that made up the cheapest market quintile on free cashflow yield. Then, with the benefit of hindsight, they built three portfolios – the best-performing 40 stocks, the worst-performing 40 stocks and the 40 businesses that were bang in the middle. So what did that show?

As a whole, the cheapest quintile outpaced the wider market by 3.3% a year – sufficient to put it handsomely in the top decile of all funds over that period. Within that quintile, the ‘Best 40’ portfolio outperformed by an impressive 32% a year while the ‘Worst 40’ underperformed by 24% a year – some stocks are, after all, cheap for good reason. For its part, the ‘Middle 40’ outperformed by just less than 1% a year.

The lesson here for the would-be value investor is you can choose to go one of two ways – the first being you take the quantitative route and systematically buy the whole cheapest quintile with no exceptions. That is a perfectly logical approach but, if you do decide to take a more concentrated active path, we would stress that you cannot do things by halves.

If you think you can just cherry-pick a handful of stocks from that cheapest quintile and then outperform the market through some kind of divine right, you are potentially heading for a big disappointment. To succeed as an active value investor, you need to be a first-class fundamental stockpicker with excellent analytical and balance sheet-testing skills – or else you need to know someone who is.

Sports Direct shares are a ‘buy’ as retailer brushes off unseasonal weather and early UK World Cup exit

Otmane El Rhazi from Mindful Money » Shares.

Analysts at stockbrokers The Share Centre have cheered the latest market update from retailer Sports Direct International.

The firm, owned by billionaire Mike Ashley brushed off any market worries to report that underlying profit before tax jumped almost 10% to £160.6m over the six months to the end of October while revenues rose by 6.5% to £1.4bn and the earnings per share increased by 4.1% to 19.4p.

Commenting on the latest set of results Dave Forsey, chief executive of the group Sports Direct said: “The results for the six months were solid considering the adverse impact on performance during the period of England’s early departure from the FIFA World Cup in Brazil and the unseasonably mild weather during Autumn reducing footfall.”

Shares in the group, which operates hundreds of stores including the landmark Lillywhites located at Piccadilly Circus in central London, have eased by 12% over the past 12 months and the broker consensus has the stock in ‘buy’ territory according to Digital Look.

Helal Miah, investment research analyst at The Share Centre recommends Sports Direct as a ‘buy’ for medium risk investors looking for capital growth. He said: “In its first half results this morning, Sports Direct reported figures that were pretty much in-line with expectations. These figures should be relatively pleasing given England’s early exit from the World Cup and the unseasonably warm autumn weather dampening customer footfall. During the period the company has rolled out large format city centre stores, signed 26 new license agreements and continued to invest in inventory optimisation and product offerings. “

Following the update by 11.16am, shares in Sports Direct were flat on the day at 675p.